An Advocis proposal introduced in the spring of 2013 entitled Raising the Professional Bar argues that by requiring financial advisors to belong to a recognized professional association, consumers of financial services will be better protected when they seek financial advice. (See Investment Executive, Professions model proposed, March 2013.) Although this proposal does have some merits, it won’t solve the problems it suggests needs addressing.
Among other things, the proposal states that a higher level of consumer protection will be achieved if its measures are implemented because a professional association will provide for high proficiency and conduct standards that will be enforced with an effective complaints and disciplinary process. Moreover, the proposal claims that there are regulatory gaps in these areas by the existing insurance and securities regulators who regulate product-oriented advice, which is mostly the advice that many financial advisors give.
Upon reviewing the details of the proposal, there are some good ideas; but this proposal, if implemented, will add duplication and cost to the oversight of financial advisors while not providing adequate oversight of financial planners. Furthermore, many advisors are looking for more efficient regulation and reduced cost to their practices.
Advocis has been promoting its proposal at various regulatory discussions this past year; the organization argues that there are four problems with the current regulatory framework that its proposed solution will solve:
- Right now, anyone can call him- or herself a financial advisor, leaving consumers exposed to unqualified advice.
- Existing regulation is focused on the sales of products, not the ongoing relationship of trust between financial advisors and their clients.
- There’s no firm and clear requirement for advisors to keep their knowledge current.
- There’s no effective, industry-wide disciplinary process.
In regard to the first problem, it’s true that anyone can call him- or herself a financial advisor — and this will continue whether someone is required to belong to an association or not. The provincial governments need to restrict the use of this title unless the person holding out with this title has the appropriate credentials.
The essence of the second problem is that because regulation is product-focused and different across the insurance and securities sectors, a regulatory gap exists. This is definitely true; but whether an association added to the regulatory framework can solve this gap is highly debatable. Once again, provincial governments can simply force these product regulators to amalgamate and harmonize requirements to the benefits of consumers.
The third problem is greatly overstated, as regulators require most licensed financial advisors to do continuing education (CE) — except for mutual fund licensed representatives. However, I’m confident that this requirement will be coming in the near future. Furthermore, if a financial advisor also has one or more designations, then there’s a further requirement for annual CE. To be fair in that argument, as Advocis sates, these education requirements are not consistent; but, again, this is an advocacy issue to have regulators harmonize their requirements.
Finally, the fourth problem is the strongest argument in Advocis’s paper in that advice may span multiple types of products — such as securities and insurance — and there’s a lack of disciplined co-ordination among the regulators in which an advisor could move to another sector if disciplined in one.
This regulatory arbitrage moves beyond discipline — in which an advisor may operate and recommend products in one sector to avoid the regulatory oversight in the other even if it is not the optimal solution for the client. The best solution to this problem is to have regulators across sectors share disciplinary information more closely and recognize sanctions more broadly — not have another intermediary body, in the form of a recognized professional association, involved to further complicate the process.
There’s one additional issue in the proposal for financial planners: the Advocis proposal states that financial planning is a specialty service provided by a financial advisor. In fact, financial planning is comprehensive and holistic advice provided by a qualified financial planner, which a financial advisor then implements through investment, estate or retirement advice. Burying financial planning within a financial advice box works against current deliberations to delineate financial planning and regulate it as a profession.
Therefore, when I consider the effects the Advocis’ proposal will have on solving the four problems it proposes need to be solved, I question the cost-benefit analysis of its proposed solution. Considering that most of the issues could be solved by more effective means, then the proposal will add duplication and cost to the existing regulatory framework with minimal return to advisors and financial consumers.
Instead, we should be going the opposite approach in consolidating and harmonizing regulators, which will lead to more effective policy and enforcement of financial advice and focus our efforts on professionalizing financial planning.