One of the unintended consequences of capitalism is that it tends to invite people to do everything in their power to make a profit, including things that may have harmful consequences for society and/or the consumer. Enter, then, regulation and laws to put limits on what industry is allowed to do for a buck – but those things only extend so far. There remains a whole swath of the world of private enterprise, near the extremities of what’s allowable by law, whose activities are legal but morally dubious. These areas tend to be the stuff of journalistic exposé, consumer-advocacy groups and the like.
(Quick aside: my intent here isn’t to open up a debate about the efficiency of free markets or the optimal degree of regulatory intervention. I’m simply noting that whatever the chosen extent of regulation in practice, you’ll find a segment of capitalist industry nipping at its heels, in search of the most profitable territory lying within – even just barely – those constraints.)
In my last post, I touched on the fact that I take issue with the pursuit of profit at the expense of the mental or physical wellbeing of others. Setting aside, for a moment, the potentially harmful effects of enterprise on workers and society – important constituencies, no doubt – I want to explore more closely the relationship between business and the consumer.
As someone who knows woefully little (okay…zilch) about cars, I’ve often – or at least as often as I’ve had car trouble – wished that auto-repair businesses would have a flag mounted on their building, color-coded to indicate their degree of integrity. Green? We’ll fix what we think we need to fix, and nothing more. Yellow? Say, your wiper blades are looking a little worn. Might as well replace them while you’re here. Red? Sorry, sir. There was no saving it, so we exploded your car with dynamite and have taken the liberty of purchasing a new one on your behalf.
What this bit of imagined consumer utopia gets at is, of course, the fact that throughout the world of industry, there are all kinds of examples of an imbalance of information between seller and buyer. Where the seller knows more about their product than the buyer, there may be a financial incentive for the seller to exploit that fact. Auto repair is one familiar example of such territory, but there are/have been many others. Examples that come to mind include: tobacco (an interesting example of what happens when the information gap between buyer and seller closes over time), soft drinks (an industry that I strongly believe will, over the next 20 years, mirror the trajectory of tobacco), pharmaceuticals (where doctors are compensated by drug manufacturers for prescriptions written), and – of course – various elements of the financial-services industry.
If you care to ponder these or any other examples you may come up with, you’ll notice that there are actually various forms of unscrupulous business. There’s the kind where the product itself is harmful and its vendor attempts to hide that fact (e.g. tobacco of yore; soft drinks today). There’s the kind where the product may not be harmful, but its vendor pushes it on people for whom it’s of no benefit (e.g. red-flag auto repair). And then there’s the interesting case where the product may not be harmful – heck, it may even offer real value to its purchaser – but it’s sold in a dishonest way, compromising consumer wellbeing in the process. This last case is, I think, disproportionately common in the financial world.
I think it’s worth using a specific example to make the point, because this is the sort of thing that happens all the time when it comes to the world of consumer finance: I recently learned about a product known as a ‘group RESP’. (RESP, for the uninitiated, stands for Registered Education Savings Plan. It’s a federal-government program/investment vehicle that assists taxpayers in saving for their children’s post-secondary education.) The Canadian RESP market has given rise to the ‘group’ plans in question, wherein the provider collects RESP contributions from a large number of people, pooling them together to achieve better (scale-driven) investment returns. So far, so good. But here’s where things get a little less transparent.
Part of the mechanism by which the provider is able to deliver “better” outcomes to its clients is by locking those clients into a set contribution schedule for a set period of time. The parents of a three-year-old might, for instance, commit to investing $50 per month until that child turns 18. Ensuring steady inflow of cash and sustained volume of funds in the pool allows the provider to achieve the aforementioned benefits of scale in investing, but what is often not well understood on the part of the consumer is that there are massive penalties to be paid in the event that you want to withdraw from the plan or even skip a single payment. (Part of those penalties, I believe, actually get funneled back into the pool, effectively supplementing returns for remaining investors. The balance is, I assume, pocketed by the administering company.) Oh, and let’s not leave out the fact that the salesperson hawking this thing is paid a handsome comission up front. (I have spoken with industry participants who tell of sales conferences where presenters have touted the compensatory power – to the salesperson – of these group RESP plans.)
So here, then, is what happens in practice with these things: zealous salespeople hunt for parents with young children and low financial literacy, manipulate their emotions (don’t you want your child to be able to go to university?) and promise huge investment returns associated with enrollment in the plan, all without explaining its drawbacks. The low-literacy consumer (who, statistically speaking, earns less than someone who is more financially literate) signs a bunch of paperwork without understanding it, thereby locking into a decade-plus of monthly payments that may or may not be sustainable for their means. The salesperson walks away with a fat paycheck. A year or two later, the payments prove to be too great a financial burden so the client seeks to cancel their enrollment in the group RESP, only to learn that 90% of their contributions to date are lost to penalties.
Did the provider or the salesperson do anything illegal? Of course not. After all, the consumer’s signature appears very clearly at the bottom of a 10-page document that fully details all the requirements, restrictions and penalties associated with the product…right?
You can probably guess where I’m going with this.
If you can design a product carrying certain restrictions/penalties/limitations that still delivers favorable outcomes on the whole, I will wish you unlimited success in selling it – provided your customers understand what they’re buying. But if you are knowingly pushing people into a purchase that they don’t understand – particularly when that purchase is likely to result in financial hardship for them – then, as far as I’m concerned, you’re a parasite. High-interest car loans are like this. Payday loans are like this. And group RESP plans, along with life insurance, mutual funds and all sorts of other financial products, can (depending on how they’re sold) be like this. Some may say that it’s the consumer’s responsibility to educate themselves, and sure – ideally, every consumer is capable of doing that. In practice, this simply isn’t the case, so I would argue that the vendor has an ethical obligation to assist the (prospective) client, even where a legal one doesn’t exist.
(Incidentally, the situation with group-RESP products results in google results on the topic that look like this… Predictably – as in pretty much every buyer-beware piece ever written – the article I just linked to features a paid industry representative quick to point out the ‘fully disclosed’ nature of the product’s limitations and intent, remaining conveniently reticent on the matter of just how many consumers – “there are individuals who” – probably don’t understand what they’re buying…)
As mellow as I pride myself on being at this steadily advancing age, I can’t lie: stuff like this really bunches my knickers. The reality is simple: it’s more difficult to sell with integrity, so people choose to sell more with less integrity, at the expense of consumer wellbeing. (If you ask me, that’s the mentality of a loser, but I digress…) As usual, my comments apply only to a subset of industry participants. How large a subset? Hard to say. But in a market with remarkably low barriers to entry, those manipulative salespeople are out there, and they probably aren’t waving a red flag around.
Thankfully, there are plenty of (intelligent) salespeople out there who recognize that only a business rooted in integrity can be sustainable for the long term, so I don’t mean to be alarmist about the whole thing. But even in the absence of outright deception, true impartiality is – I think – hard to come by in an industry that’s categorically compensated in proportion to how much of its clients’ money it controls… So how could a financial-services business achieve true impartiality with respect to its clients’ investments? And what would be the result if it did?
Hmm, good questions. I’m glad I asked…