Time to Rethink the 'Sophisticated Investor'
13 Pages Posted: 31 Aug 2015 Last revised: 1 Sep 2015
Date Written: June 30, 2015
Financial regulators need to change the way they think about so-called “sophisticated investors”. Regulators’ current approach disenfranchises the millions of people these big investors are supposed to serve. That makes it impossible for those people to hold such big investors accountable. This creates a dangerous flaw at the heart of the way financial markets are organised. This is not just abstract musing: it is demonstrably leading to poor outcomes for the ordinary people who depend on big investors. The good news is that regulators can make a difference by applying a simple principle to “sophisticated investors”: accountability. It need not cost a lot or involve a lot of bureaucracy. They must demand that big investors, and the asset managers they hire, disclose more to the public. What they disclose must allow (truly) independent outsiders to analyse how well the big investors have performed. This includes being able to judge how cost-effective they have been. Anyone who believes in markets knows that harnessing people’s self-interest helps to make markets work. If regulators choose to enfranchise the rest of society, they will be doing just that. Vested interests - including much of the finance sector, many big investors and even some regulators - will call this idea outlandish. Some will portray it as an attack on financial markets. Even disinterested observers may worry that it will damage markets or the economy or both. Nothing could be further from the truth. An 80-year-old parallel shows the way. This change in approach would help to ensure that financial markets serve society as a whole, rather than just the people who work in them.
JEL Classification: G23, G28, G30, N42
Suggested Citation: Suggested Citation