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Dodd-Frank Dummies

Ignorance is bliss. A lot of wealthy individuals are tired of the constant grandstanding in D.C. over financial reform, and, frankly, don’t think the effects of the Dodd-Frank legislation merit close attention.

That’s our interpretation of a recent survey by State Street’s Center for Applied Research. Just 32% of high-net worth individuals think regulators can create safer, more sustainable financial markets; only 4% have a high degree of trust in politicians, ranking the pols dead last among a selection of other financial market players. Interestingly, banks were the most highly trusted – at a still dismal 27%. Of course, perhaps that best-of-the-lot stat was influenced by the group asking the questions.

At Penta’s request, State Street’s Suzanne Duncan, the firm’s head of research, kindly separated the survey’s 908 U.S. retail investors into income groups. In the top group – investors with $1 million or more in investable assets – 32% of investors had not heard of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Duncan calls this level of unawareness, even among the most affluent, State Street’s “fall out of your seat finding.”

It had us scratching our head, too. Wealthy investors have more of their assets bottled up in the financial system and employ a deeper network of advisors and wealth managers to keep them informed. So why aren’t these investors knowledgeable about the most sweeping legislation in financial regulatory history?

State Street performed a round of follow-up interviews to get some answers. Duncan says the research suggests it is not laziness or lack of time. It’s a fear of understanding how the measures would personally affect wealthy investors that had the responders keeping the blinders on. “They’re going in with the view that it will negatively affect them, so why know the answers?” she says. If you don’t have any control of what is going on, there’s no point in getting involved, she explained.

It gets worse. State Street found that 36% of wealthy investors spend more time reading free catalogues than their financial statements. It’s easy to conclude these individuals are placating their fears by indulging in their subscription of Orvis and Victoria’s Secret catalogues.

We’re not satisfied with this answer. If one-third of high-net worth individuals are ‘afraid to know’ about Dodd-Frank, it begs the question, ‘Then why risk such a substantial amount of your wealth in the financial markets?’ The wealthy folks we come across are pretty hands-on and curious, and don’t at all seem inclined to stick their heads in the sand. We suspect something deeper is at play.

Post-financial crisis the assets of America’s top five banks have grown more than 40%. Rather than reversing too-big-to-fail, the threat is in fact greater than ever. Therefore, it’s logical to conclude- wealthy investors aren’t so much afraid, as they are deeply skeptical of any material impact that Dodd-Frank will have on their immediate investment outlook or risks. So why pay attention?

Are we alone in thinking this? “I don’t believe anybody, including the regulators or the politicians, actually believe they have fixed anything,” says Mindy Rosenthal, president of the Institute for Private Investors. The massive behind the scenes negotiations, from the time a bill reaches committee until its passing, produces lobby-loophole legislation that pales in comparison to its original intent.

Furthermore, IPI’s sophisticated clients, with a minimum of $30 million in assets, were forced to comply with Dodd-Frank’s new family offices rules, so Rosenthal’s clients are in fact very aware of the legislation and its impact. But individuals with a less sophisticated investment portfolio were impacted to a lesser extent by Dodd Frank, since it’s been diluted at that level to the point of almost being arbitrary, she says. Rosenthal can safely say, however, that the general cynicism directed at Congress and regulators could explain investor’s disinterest.

The common concern among Rosenthal’s financially-savvy clientele is that regulatory agencies are typically packed with lawyers who often don’t have a financial services background. “People feel [regulators] don’t really understand how things work or appreciate the complexity,” she says.

It’s hard not to come to the conclusion we are more and more resembling Italy, where the opera buffa of the nation’s political class is blithely ignored by the serious folks who are building their businesses and wealth regardless of what happens in the corridors of the capitol.