Wednesday, December 1, 2010

Addressing a Shortage of Competent Financial Advice

Canada has no shortage of financial advisors, but some investors complain that it is hard to find an advisor who isn’t just a mutual fund salesperson. No doubt good advisors exist, but perhaps they are in short supply because of the requirements to get a designation.

Mike Holman described the requirements to get 4 different designation levels. The requirements for the top two levels caught my eye. In addition to having to pass exams, becoming a Certified Financial Planner (CFP) requires “two years of direct financial planning experience,” and becoming a Chartered Financial Analyst requires “four years of related investment experience.”

Why not make the testing more stringent and reduce the time component? The answer is that these rules are designed to protect those who already have the designations from competent competitors. With these time requirements it’s almost impossible to hold these designations for part-time work no matter the competence of the candidate.

This criticism can be made of most professional designations in other fields as well. It is very common for entry to professions to involve requirements that keep out anyone who isn’t 100% personally committed to working in the profession no matter how good they are at the work. In this case the side effect is investors facing an apparent shortage of fee-only financial advice.


  1. I understand what you are saying and it is undoubtedly partly true although I have to say that having experience before advising individuals is I believe a good thing. Understanding markets isn't just about reading a book and taking a test.
    Still I think the scarcity of fee only advisors is partly because the selling of funds etc, is easy and it is highly lucrative. Just go to any big broker and you are on your way.

  2. To add to what DIY rightly says, it's difficult to stay afloat while developing a fee-only practice.

    I think the biggest issue I have with this post is that multiple choice exams don't effectively evaluate understanding, only recall. That's part of why I have no desire to earn the CFA. If the CFP board cared, the test would not be "fill in the bubble", but to write and justify a realistic financial plan.

  3. @DIY Investor and @Robert:

    I take your point that existing tests by themselves are inadequate. I'm all for more extensive testing -- perhaps even testing in live interaction situations if that helps identify better candidates. However, 4 years of practice is excessive.

  4. @Dale: I hesitate to call it a conspiracy, but you're right that long time requirements to get into a field are effective at keeping part-timers from competing with existing full-timers.

    1. The comment above is a reply to Dale Rathgeber's comment below. Further below is a subsequent reply by Dale.


      Great Post today; the 2 year CFP training requirement is newish. It is doubtless an industry-protection conspiracy to keep persons like you and me from passing the test and "hanging out shingles".


      @Michael; is it possible that we agree on something? If so, I will need to re-think everything!

      Keep up the good work; and I will keep constructively criticizing, when I feel it is warranted.

  5. I don't understand why one needs to rely solely on certifications. As an IT professional I have a bunch of such professional certifications but I believe that their value is to get me through the decision makers who cannot understand anything else. It's very difficult to make a difference in many areas yet in matter of financial advice, I don't see any issues to split the good from bad. A financial advisor needs to make money for its clients. Especially now, it's a great time to prove the capacity of giving good financial advices. If one is capable of leading the clients to profits in these uncertain times, he/she will definitely do the same in good, stable times!

  6. Thanks for the link. The time elements do seem a bit excessive, although there is something to be said for experience.

    For the record, you don't have to have a CFP to be a financial planner or a CFA to be an analyst or portfolio manager, so it's not like a specific license.

    The thing that bugs me about the experience needed is that practically the only way to get it, is to work with a "normal" commission-based investment planning company or brokerage. So even if I wanted to be a fee-only (ie charge by the hour) advisor - if I want the designations I need to push expensive products for 2 years first.

  7. @Andi: I agree that we don't always need to rely on certifications, but it would be nice to make the certifications have as much meaning as possible.

    @Mike: That's interesting. Having to spend the 2 years gaining experience doing something that doesn't help clients seems like more of a waste of time than I expected.

  8. Andrew Hallam made the following comment on 2010-12-10:

    Some good points made here. But the advisor without the full credential, who has taken a test (that honestly doesn't educate as extensively as someone earning a teaching degree, engineering degree etc) gets to "play" investment advisor with real people and real money. How many people work at banks advising people without a CFP credential? I go in all the time, with friends, and I ask them. I have met many people who have taken 2 week courses (yes, that's it) and they're selling funds at TD Bank with no other experience. I don't put much stock in the education of most of the bank's employees.