It’s time for financial professionals to become a profession in
substance, not just in name.
SEC has proposed new rules for brokers and financial advisors.
Observers have understandably focused on the big change, which requires brokers
to disclose their conflicts and look after clients’ best interests.
But a more modest proposal deserves discussion. Namely, the SEC would
subject financial advisors to continuing education requirements.
It’s a wise move. Financial innovation is happening at a dizzying pace.
More investment options are available today than ever before, spanning many
different types of assets, geographies and investing styles and new products
are coming to market all the time.
That’s a challenge for an aging industry. The average age of advisors is
50, according to Cerulli Associates, and just 11.7% of advisors are younger
than 35. Whatever advisors learned when they were trained for the job decades
ago is most likely outdated.
It’s not even clear how much advisors knew to begin with. Investors
would be aghast if they realized how easy it is to become a financial
“professional.” Investment advisors must simply take a three-hour exam and
answer just 72% of the questions correctly.
Brokers have a slightly higher hurdle. They’re generally required to
pass two exams and they’re already subject to continuing-education
Compare those barriers with the demands of any other profession.
Doctors, lawyers and accountants are subject to multiyear formal education,
famously rigorous licensing exams and continuing education. The work of
financial professionals is just as important. Why do investors demand so much
less of them?
One of the SEC’s stated objectives is to apply “consistent principles”
to advisors and brokers. This would be a good place to start. In a column I
wrote in March 2016, I said that, in addition to continuing-education
requirements, advisors and brokers should have to “complete a minimum amount of
undergraduate or graduate-level course work in finance, accounting or economics
and pass a multiday comprehensive exam that covers — at a minimum — law and
regulation, economics, financial statement analysis and portfolio management.”
I received a mountain of passionate emails at the time, much of it from
advisors and brokers.
Readers pointed out that many financial professionals are well-meaning
practitioners that “make a positive difference in the lives” of their clients
and that no amount of education and training would deter unscrupulous actors.
That's all true, but it shouldn’t be an excuse for holding financial
professionals to a lower standard than other professions. And it would be easy
to raise the bar because the necessary pieces are already in place.
Finance, accounting and economics — and given the industry’s turn to
quantitative investing, let’s add statistics — are widely taught in colleges
and universities. Organizations such as the CFA Institute and the CFP Board
have administered rigorous and comprehensive multiday exams for financial
professionals for decades. (Full disclosure: I’m both a financial advisor and
CFA charterholder.) All that’s needed is the willingness to hold the industry
to a higher standard.
Granted, it’s probably unrealistic to impose new educational and exam
requirements on the current crop of advisors and brokers. But those
requirements can be adopted for the next generation, and everyone should commit
to keeping their skills current through continuing education.
If regulators won’t compel financial professionals to reach higher, they
ought to do so voluntarily. Investors are handing ever more of their money to
index funds, robo-advisors and other computer-based alternatives to human
professionals. It’s only a matter of time before investors turn their financial
planning over to the bots, too. If professionals are serious about competing,
they’ll have to persuade investors that they know as much as the machines.
The SEC is right to demand that financial professionals look out for
investors’ best interests. But that’s not enough. They must also have the tools
to live up to that lofty standard.
here for the original article from Financial Planning.