Financial Advice – It’s Not Only Cost, but Quality
There have been countless articles written on the cost of financial advice in recent years. Every time I pick up a Wall Street Journal or a popular personal finance column there’s a story about fees. They are right to criticize. Financial services costs remain high even though advances in technology have reduced costs dramatically.
This laser-like media attention on costs has sparked a revolution in financial services. Investors are flocking to low cost ETFs, whose AUM surpassed that of hedge funds in 2015. For Do-It-Yourself investors, online, automated investment services called robo-advisors provide basic asset allocations for one-third the traditional costs of similar advice.
These reductions in costs are good for investors. After all, the less you pay to invest, the more returns you get to keep. I would like to see the media turn its attention now, to the quality of financial advice, not just the cost.
Providing financial advice does not have a uniform education requirement, licensure, continuing education, or self-regulatory institution like many other established professions. Anyone who can pass a low level test has the right to call him or herself a “financial advisor.” Financial planners do not need credentials to enter the field. The disparity in the quality of financial advice investors receive can be enormous. Some financial advisors have zero educational background or training in investing. Other advisors have PhDs and many professional designations. Might a difference in the price of these two individuals make sense?
For a long time, savers had no need for a financial services profession. The overwhelming majority of Americans covered their retirement income with pensions and Social Security. Few individuals needed financial advice to secure their retirement. For the few who chose to bet on the occasional stock, they only needed a stockbroker to take their order.
Thirty years ago, the American system of retirement shifted from pensions to 401k plans. Now individuals bear the risk of investment returns rather than their employers. This shift occurred in tandem with the greatest 20-year bull market for US stocks. The problem of sub-par financial advice was temporarily masked by a tide that floated all boats. Today, millions of Americans must figure out how much to save and how to invest those savings. Many investors rely on advice to make these critical investing decisions. Many are unaware they receive advice from individuals with little formal education or training.
The financial services industry recognized the need for more education and training of advisors. The response was not singular, but rather the simultaneous rise of many solutions. As a result, we have a confusing list of alphabet soup designations and credentials. The disparity of the rigor and substance behind these designations is vast. Investors should not assume a level of credence in those credential letters. Some of the designations require attendance at a weekend seminar and a basic test. Others require many years of study and are equal to graduate level degrees. Unfortunately, the result is more confusion for investors.
I would like to see the media take on quality of financial advice as their next topic to champion. Investors need to know the questions to ask an advisor to determine their level of competence. They also need to know the difference between designations in the alphabet soup.
My sincerest hope for the future of financial advice is that we create a true profession. I envision a model in which financial advisors must earn undergraduate and graduate degrees. They must sit for a rigorous and comprehensive exam like the Bar or CPA exam. They must complete a large number of hours of continuing education each year. Advisors will serve an apprenticeship period under the guidance of another advisor. I can think of no better way to ensure that investors in the future receive the quality of advice they deserve.