That Financial Advisers Column That Upset You

Gadfly column I wrote last week arguing that financial advisers are subject to inadequate professional standards generated passionate responses from readers who agreed with the thesis and those who did not (including advisers, of course).

Because interest in the column was so intense, I wanted to share some of the critical comments I received from readers, and to explore those comments further.

An anonymous correspondent emailed me this:

Are you crazy? I am not sure what exam you took but the Series 7 is a 6 1/2 hour exam. Followed by more exams, either your 63 & 65 or your 66. Not to mention your insurance and annuity license. Your article is extremely biased and not accurate.

To clarify some terminology: I used the term “financial adviser” in my column to refer to financial professionals generally. When investors work with a financial adviser, it is commonly a broker or a registered investment adviser (RIA). Brokers buy and sell investments on behalf of clients, and clients pay a fee for each transaction. By contrast, RIAs provide ongoing investment advice, and clients typically pay an annual fee based on a percentage of assets the RIA oversees.

The numbers our anonymous  e-mailer refers to are the various licensure exams for financial advisers. In most cases only one or two exams are required for licensure. The minimum standard applies to RIAs, who are required to pass one exam. Brokers have a marginally higher licensing hurdle; they take two exams – the so-called Series 7 and Series 63 – while RIAs take just the Series 65.

Brokers and RIAs can also choose to take additional licensure exams to sell insurance and other financial products that are separately regulated. Brokers also have continuing education requirements, whereas RIAs do not.

But the higher standard for brokers is meaningless if a license to give financial advice can be obtained via the lower standard for RIAs. More to the point, the higher standard for brokers is still laughably low! Would you trust a doctor, lawyer or accountant whose only credential is passing two exams?

An investment adviser who emailed me but asked to be quoted anonymously wrote:

Is it not true that perhaps there are unscrupulous lawyers, doctors, and yes even CPA’s? This is in light of the arduous education, and process of exam and experience which create for them the opportunity to practice their trade. You don’t mention, perhaps intentionally, that point in your piece.

Yes, I am confident that financial advisers do not have a monopoly on impropriety. The fact that we even know the rates of misconduct for financial advisers is a great credit to the financial industry’s transparency in that regard. The rates of misconduct may be as high or higher in other professions, but opaque disciplinary procedures make it difficult to know.

It’s true that no amount of education and testing will deter those who are determined to break the rules. Even so, we still have to recognize that too many financial advisers are inadequately trained. Dave Forbes, a financial adviser, sent this email to me:

The consumer of professional financial advice has a variety of options to engage a qualified professional. The Certified Financial Planner (CFP) and Chartered Financial Analyst (CFA) are two professional designations that provide all the requirements you mention and more.

True! Some organizations are leading the charge for higher standards, and many financial advisers have answered the call. The CFP Board, which administers the CFP certification, and the CFA Institute, which administers the CFA designation, each require some combination of formal education, a comprehensive multi-day exam, a commitment to high ethical standards, and continuing education. (Full disclosure: I am a CFA charterholder.)

Why not require these high standards of all financial advisers? Andrew Acherman, a financial adviser, said this in an email:

I love what I do because I make a positive difference in the lives of my clients and I have become their conscience so that they will do what they need to do to achieve their goals. This is a marked difference from the state of affairs that you described in your article.

Don’t get me wrong: As the study of brokers I referred to in my earlier column implies, the vast majority of financial advisers are well-meaning practitioners. I also believe that most investors would be better off working with a highly trained professional who is committed to high ethical standards.

While many financial advisers voluntarily rise to that standard, a meaningful number do not and the industry should revisit the notion of what it means to have real expertise and a real sense of duty to investors.

Source: Bloomberg Gadfly,