In theory, the efficient market is supposed to reward the business that create products and services that improve the lives of their customers, while businesses that create harmful or ineffective solutions generate no income and cease to exist. Industries where the marketplace is too inefficient, and/or where bad products and services can result in public harm, receive some type of regulation to ensure the public good. Given the remarkably inefficient nature of marketplace for advisor education, perhaps it's time for some sort of oversight there, too? :/
The inspiration for today's blog post comes from a recent article in The Wall Street Journal entitled "Who's Advising Your Advisor" (also called "Putting the 'vice' in Financial Advice"!) about a number of the questionable organizations that provide designations and certifications in the financial services world. The take on the article is a little different than the traditional media focus of just listing organizations that offer fancy-sounded credentials for ultra-brief periods of study; in this case, the article lists organizations that include key staffers who have actually committed financial services crimes and in some cases, are barred from the industry, yet still provide education for advisory certifications from their self-appointed organizations.
Of course, the theoretically efficient marketplace would punish such organizations for their lack of credibility. But in the real world, the due diligence is difficult at best; when according to NASAA it potentially takes separate searches to all 50 state insurance regulators, plus FINRA's BrokerCheck, for each of several key people in the organization, just to determine if it might be filled with any questionable characters, the due diligence burden is pretty high, to say the least.
Arguably, the burden is even worse for consumers, who would not only have to check up on their advisor, but then also the key individuals of any/all organizations that granted any credentials the advisor holds? The WSJ article points out key questions a consumer can ask, such as "What percentage of the people who apply for that credential earn it" or "What qualifications did your instructors in that program have?" but the reality is that many good advisors might not know the answers to those questions, and any "bad" advisors can probably still spin a good-sounding answer to an otherwise un-educated consumer. Or, frankly, the bad advisor might just give a plausible lie; again, with the excessively high due diligence burden, it's unlikely to be caught, or at least not until after the financial harm has been done.
As I have written in the past, I don't necessarily think it's a bad thing that advisor designations continue to proliferate - it's part of how the professional body of knowledge is advanced. But the problem is that right now, anyone can hang a shingle as a organization that grants a professional designation, issue a whole bunch of those designations so that recipients can imply credibility and worthiness of trust to the consumer public, and it may take months, or years, or longer, for the marketplace to sort it out. After all, in the short term, the demand is for designations, even (or especially) if they can be obtained quickly; which means questionable organizations can flourish for quite a while granting letters for questionable advisors who can use them for sometimes less-than-stellar motives. In other words, the bad news is that perhaps the market actually is efficient - in rewarding organizations that make it easy to get a designation from "advisors" who are seeking one.
As mentioned earlier, there is a solution to problems of this nature - oversight and regulation. And while it's true that many planners justifiably feel like so many segments of the financial services industry are already heavily regulated, the space for professional advisor education seems to be a noticeable exception. At best, the only indirect oversight of education right now occurs from broker-dealers who check out the designations their advisors obtain (and sometimes don't allow them to put questionable ones on their business cards), some credible organizations like the CFP Board who look at other educational materials for CE purposes, and occasionally a state regulator gets involved. But there is no central location for consumers - or advisors - to see a list of credible organizations and the certifications/designations they grant. And of course, if the organization doesn't grant a designation but just provides education, there's even less oversight - whether it's the advanced financial planning education from yours-truly at Kitces.com, or at the other end of the spectrum a sales training that is busted by the media.
So what might the solution be? It doesn't have to be heavy-handed oversight, necessarily; ostensibly, some sort of voluntary accrediting body that affirms the quality of an organization and its educational materials might be sufficient, as is done in the world of Continuing Professional Education (CPE) for accountants via the interweaving of the National Association of State Boards of Accountancy, the National Registry of CPE Sponsors, and the Quality Assurance Service. Although organizations can offer CPE without being registered, in practice the registry and QAS have penetrated the accountant education marketplace enough over the past 10 years that accountants increasingly question organizations that aren't registered accordingly. And to say the least, it's easier to tell advisors and consumers to do their due diligence by checking one central registry for education providers, rather than a 50+ state and Federal insurance and securities regulators!
Is it time for a centralized education registry in the financial planning world to affirm the quality of educational materials and providers? These days, most state boards of accountancy rely on the registry to the point that they don't separately certify and evaluate educational materials anymore, so this doesn't necessarily have to create a duplicative cost structure for education providers. But it would be nice to have a credible central clearing house, wouldn't it?
What do you think? Is it time for a change to address the apparent inefficiencies in the advisor education marketplace? How can we help separate the wheat from the chaff?
Steve Wershing, CFP says
I agree with your observation that free markets should facilitate higher quality in widely consumed products or services and am, like you, disappointed that they do not seem to, at least in this case. I disagree with your solution – that some form of regulatory oversight would provide to us the quality we do not have now. We cannot legislate or regulate to higher quality or good behavior. Under the regulatory oversight theory, securities laws would prevent consumers from being abused, the Fed would prevent damage to our economy, and the Department of Education would assure ever-increasing standards of public education, none of which is what actually happens. Government regulation doesn’t work for the same reason free markets do – people respond to incentives. Place the power to supervise anything, and the person who supervises will respond to whatever incentives provide the most good to him. Members of the CFP Board and the CFP board itself do not monetarily benefit by developing the proper standards and enforcing them. The organization and its members benefit by maintaining the integrity of the CFP mark, and so the system, while far from perfect, works reasonably well. Politicians who oversee the SEC will respond to campaign contributions and network connections to powerful people, and so the major brokerages will get favorable treatment in the handling of issues like a fiduciary standard. Place oversight of educational standards for financial literacy in the hands of a quasi-governmental body, and, like the Department of Education, we will see a continued deterioration of standards as that body responds to powerful organizations with large constituencies whose incentives are not necessarily rising standards. Independent, voluntary bodies who can make their evaluations available at low-cost or without cost like the CFP Board, Underwriters Laboratories, or even the Good Housekeeping Seal of Approval in conjunction with a broad campaign to encourage people to be smart consumers and not to rely on some outside organization to protect them would, I believe, benefit us far more in the long run. It would also have the benefit of encouraging the free exchange of ideas that would give rise to advances in knowledge that are so difficult to accomplish under bureaucracies like the Department of Education.
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