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Should Financial Advisers Be Licensed?

January 3rd, 2011 · 1 Comment · Philosophy In Financial Planning

Licensing in the financial planning industry is almost taken as a given. Various financial planning educational institutions and organizations welcome, with open arms, the idea of licensing all individuals who want to work in the financial planning industry. They employ lobbyists and even call for a centralized organization that would serve as the AMA of the financial planning industry.

Government agencies issue licenses to sell financial products and certain educational institutions push for standardized tests and designations as a requirement for doing business. All of this is supposed to guarantee quality of service in the industry.

By having minimum requirements, it is argued, financial planners will be held to a "higher standard". Clients won't be taken advantage of. Advisers will have better education, since they will be forced to take "continuing education" courses for their entire career. Clients will be benefited by better advice.

This notion that licensing does anything beneficial is completely false. First, licensing does not keep out, and cannot keep out, fraudsters. Criminals do not follow the laws, regardless of what they are. The most recent example of this is of course Bernie Madoff. Second, continuing education as such may be beneficial for advisers. However, continuing education exams administered by the State are laughable. For example, in New York, continuing education exams consist of tests which are impossible to fail. Tests may be done electronically. If a passing score is not achieved, then the test restarts. The adviser continues until he passes. How this is supposed to produce superior advisers or weed out incompetence, I do not know and the State remains silent on this issue. Finally, clients are not guaranteed better financial advice simply because an adviser has passed their State exams. The exams simply authorize an individual or business to sell advice or financial products according to the particular license obtained. 

The only thing that licensing does do is dissuade or prevent advisers from achieving their highest potential. Advisers are forced to take State-approved educational courses several times a year (interrupting their busy schedules), adhere to arbitrary rules and keep extensive records on client suitability when recommending financial products. Advisers may be sued over their recommendations and must carry liability insurance which covers such lawsuits.

Licensing requirements prevent advisers from making recommendations that they may otherwise make. All financial products are "grouped". Each "group" has its own licensing requirements. For example, "life, health and accident" insurance requires one license type. "Property and casualty" insurance requires another. The "series 6" allows an adviser to recommend variable contracts like variable life insurance and variable annuities, but not mutual funds. The "series 63" allows the sale of mutual funds. Sale of stocks and bonds require a "series 7" license. An adviser is barred from making specific recommendations for products for which he is not licensed. Consequently, there is little incentive for an adviser to become educated and keep up with new laws and regulations concerning financial products that the adviser isn't licensed for.

Each license obtained comes with additional annual fees (or fees due every 2 years) and (annual) continuing education requirements. On top of that, each new license the adviser obtains subjects him to increasing oversight and regulation by the FINRA and the SEC as well as state insurance commissioners. The mandatory Firm Element training, licensing fees for conducting business, suitability paperwork, disclosure rules and paperwork, and sales and marketing regulations are enough to keep many advisers from wanting to expand their business.

Most importantly, as a moral matter, every individual has a right to his own life and to the pursuit of his own happiness. Yet, licensing violates and restricts these rights. It prevents an adviser from conducting business on his terms, and it prevents a client from trading freely with whomever he wants to receive advice from.

What should the government, and the financial planning organizations do? Simple. End all licensing requirements, and get out of the way of the adviser so that he can run his business.

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