Nir Kaissar is a Bloomberg Gadfly columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
“Financial advisers are often perceived as dishonest, and consistently rank among the least trustworthy professionals.” So proclaims the Capital Ideas Blog of the University of Chicago’s Booth School of Business in a post about a new study that finds that 7 percent of advisers have been disciplined for misconduct.
My Bloomberg colleague Barry Ritholtz rightly calls this an astonishingly high number, but the business of financial advice suffers from an even more astonishing problem: Precious little is required to become a financial adviser.
Want to be a financial adviser in the U.S.? All you have to do is pass the Uniform Investment Adviser Law Examination, a three hour exam that covers a variety of law and investment-related subjects. Just pay the $165 exam fee and answer 72 percent of the questions correctly -- a feat that realistically requires several weeks of study -- and you’re in.
Ever heard anyone complain about how difficult it is to pass the investment adviser exam? Now you know why. (Full disclosure: I'm a financial adviser.)
Compare this laughably low bar with the prerequisites to practice medicine, law or accounting. Each of these professions requires formal education, a famously rigorous licensing exam, and then continuing education -- none of which is required of investment advisers. My guess is that very few people would trust a doctor, lawyer or accountant whose only credential is passing a three-hour exam. So why aren't we demanding more of financial advisers?
Advisers have the power to profoundly improve lives by encouraging saving and responsible investment. But like other professionals, they also have the power to do great harm, as we are reliably reminded every few years in the media or the courts with a fresh variation on the financial scandal theme.
The answer to these scandals is always the same: more regulation. Yet no industry is more regulated than financial services, and we still aren't seeing better outcomes. Yes, regulation is absolutely necessary, but we need to own up to the fact that too many advisers don’t have a clue as to what’s in the regulations or, more fundamentally, are not adequately trained to do their jobs.
It’s time for financial advisers to join the family of professions in substance, and not just in name. We should require that aspiring advisers complete a minimum amount of undergraduate or graduate-level coursework in finance, accounting, or economics, and pass a multi-day comprehensive exam that covers -- at a minimum -- law and regulation, economics, financial statement analysis, and portfolio management (requirements that should inspire as much fear as the CPA exam, the bar exam or medical boards).
Advisers should also be bound by a code of ethics that aims higher than what current regulations mandate. Given the ever-increasing pace of financial innovation, continuing education should simply be mandatory for maintaining a license.
A better trained and more accountable corps of advisers would undoubtedly raise the quality of financial advice. It may also reduce the high rate of misconduct because:
Advisers will be required to invest substantially more time, money and effort into joining the profession, and will thereby have more to lose by engaging in misconduct.
A high hurdle for licensure will naturally discourage less serious candidates who may be inclined to cut corners as advisers.
A rigorous admission standard will raise the value and prestige of advisers’ careers, reducing the temptation to bend the rules.
Advisors will be properly inculcated in high ethical standards.
Granted, it would be unfair and impractical to impose new licensing requirements on already licensed advisers, but there is no reason why all advisers shouldn’t undertake continuing education. The number and diversity of investment options today would have been unthinkable to an adviser who began his or her career two decades ago. We implore investors to keep up with financial evolution -- shouldn’t we demand at least that much from advisers?
Without better training, more regulation will never be enough to improve advisers’ behavior. If investment advisers want to be trusted professionals, they must first become a profession. If they don't, count on more horror stories about unethical, fraudulent or errant financial advisers.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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