Industry barriers to entry are too low

For roughly a decade a huge shift has been moving the financial services industry away from commissioned brokers associated with a wirehouse or indie broker/dealer and to Registered Investment Advisors who work for a fee. Without a doubt, this is a good thing. The conflict that comes with commissioned advice is unnecessary, and investors deserve better. Especially considering most investors operate under the misguided assumption that the financial professional is working with their best interests in mind, even when that is often not the case. More advisors working under a Registered Investment Advisor ultimately means more fiduciary advice.

There is a downside as this shift takes place when it comes to training and licensing. The requirements to be a broker (aka Registered Representative) are clear and well established: pass the Series 7 exam. Let’s be clear: the Series 7 isn’t exactly like passing the Bar or graduating from medical school. It’s more like cramming for a few days or weeks before a freshman year final exam. To pass the Series 7 you at least have to be able to define stocks, bonds, mutual funds and options. It’s not much, but it’s a start.

To be affiliated with a Registered Investment Advisor (technically making the individual an Investment Advisor Representative), you don’t need the Series 7. The only requirement to be an Investment Advisor Representative is to pass a much less trying exam, the Series 65. The Series 65 exam is roughly half as long as the Series 7 exam, and (in my opinion) is much less technically challenging.

So we find ourselves in a world where the only barrier to holding oneself out as a competent fiduciary advisor is a few hundred dollars in state registration fees and a 3-hour exam. I can’t imagine anyone intentionally designing a system where we are trying to make it easier to be a fiduciary advisor than a stock broker, but that is where we are.

If we as Registered Investment Advisors want to be taken seriously as professionals, we have to raise the barrier to entry. Potential advisors should have a much broader knowledge base before practicing. The CFP and the CFA are a great place to start (note – I am a CFP practitioner but not a CFA), but not a requirement in the industry. Unfortunately, the CFP board has taken steps to lower the barrier to acquiring the CFP marks rather than raising it. For investors, an advanced designation should be a prerequisite for any professional you may consider working with. Moreso than the knowledge gained in the process, the advanced designation demonstrates the professional’s commitment to ongoing learning.

Whether the solution comes from regulators forcing the administration of a much more challenging entry exam or the industry raising the bar for advanced designations, something needs to give. If a representative is going to hold out as a fiduciary advisor under an RIA, the public should be able to be reasonably assured that this person is competent to give advice in the client’s best interest. I am not sure that is the case today.


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