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Advisors need more rigorous licensing


Alex MacMillan

Tuesday, April 08, 2008

In a March 27 article, "Were ABCPs Insured?," Financial Post editor Terence Corcoran argues that it is wrong for those investors whose funds are now locked up in the $32-billion ABCP Purdy Crawford freezer to cry "victim." Mr. Corcoran argues that even small retail investors should have known of the risk they were undertaking by investing in such paper, in spite of their bankers and financial advisors telling them there was no such risk. Essentially, it's a buyer beware situation, and it is the responsibilities of both parties to such financial transactions to know exactly what they are doing.

But in the world of complex financial products, the risk and returns are not obvious to most people. Certainly, the best financial advice that can be given to those who have the capability and aptitude is to allow investment advisors and brokers to explain potential investment products to you, but never give such people the slightest wiggle room to make investment decisions on your behalf. Instead, take some time to learn the basics elements of risk, return, financial investment products and portfolio management, and then never invest in anything you don't fully understand. Such financial fundamentals do not require an MBA, or, in fact, any educational requirement beyond a good understanding of percentage measurements. And, they do not require inordinate amounts of time to acquire. Consider it financial exercise. Do a little learning each day. It will be very good for you.

But what about most people, who neither have the time nor the aptitude to learn the basics of finance? There are two possible courses for such people. Either they keep their money in federally guaranteed deposit accounts, or they rely upon those who hold themselves out to be financial experts. Clearly, financial advisors (you know, the ones with the certificates of completed financial educational programs proudly displayed on their office walls), whether in banks, brokerage houses, or working independently, hold themselves out to be expert in the financial products for which they give advice - as do lawyers or doctors in their fields of expertise. Aren't financially challenged people advised continually, even in the pages of this paper, to get "expert" advice before investing?

Should not the financial advisors who told their clients there was negligible risk (when they, being expert, should have known better) be held at least partially culpable in the ABCP mess? A young advisor, quoted in another FP article of April 1 (Investors Angered by ABCP Plan, Sean Silcoff), professed his shock in unwittingly investing $1.3-million of his clients' money in the frozen ABCPs. "I would never have suggested this [investment] had all the facts been presented to me beforehand." I'm sure most of the advisors were unwitting in their bad advice, but that's just the point; they should have been witting. They hold themselves out to be witting to the people they advise. They have those certificates on their walls, after all. If advisors don't have all the facts and a full understanding of the risks involved in the products they put their clients' money into, they have no business doing so.

Frankly, I believe there are too many unqualified, though certified, financial advisors around these days: people advising on products they do not fully understand. In my view, those who seek financial advice, on average, receive far less expert opinion than those who seek legal or medical advice, or advice on how to get the car fixed.

Certainly it is best to learn the ins and outs of financial products for oneself, and many people are quite capable of doing just that. However, for the majority who require professional financial advice, it may be time to consider a more formal, and more rigorous, licensing procedure before a person can be designated "financial advisor" or "personal financial consultant" or what-have-you and have a certificate pronouncing as much on their walls. This may mean fewer "financial advisors" and more expensive advice than one might get at the local bank or credit union branch for "free." But then, free financial advice, it seems, is too often worth exactly what's been paid for it.

-Alex MacMillan is a retired economics and finance professor at Queen's University.
 

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