I sometimes wonder why financial advisors need a license. Perhaps the government believes that these regulations protect the public from making poor financial decisions. But what is a bad financial decision? Is buying a managed stock mutual fund a bad decision for the common man? What about an index fund?
Perhaps the government is concerned that unregulated financial advisers could give bad advice, such as encouraging people to believe that buying lottery tickets is a good way to get rich. On the other hand, if that was the reason, why would government officials give in? this kind of advice:
Lottery officials announced Monday that it will cost $5 to play the Mega Millions, starting in April, up from the current $2 per ticket. The price increase will be one of many changes to Mega Millions that officials said will lead to improved jackpot odds, more frequent big prizes and even bigger payouts.
“Spending $5 to become a millionaire or a millionaire, that’s pretty cool,” said Joshua Johnston, director of the Washington Lottery and lead director of the Mega Millions steering group.
Does Joshua Johnston give good investment advice? Are you a licensed financial advisor?
On a more serious note, I suspect that the original the motivation behind the licensing requirement for financial advisors is the same as the real motivation behind all other occupational licensing restrictions—the protection of new stakeholders.
Some would argue that Bernie Madoff’s fraud demonstrated the need for licensing requirements. Actually, that case showed the opposite; licensing requirements do not address a key problem in the financial services industry, which is ethical risk.
Based on what I’ve seen, the main problem in the financial services industry is not unlicensed professionals recommending the wrong stocks, it’s licensed professionals encouraging their clients to invest in the best interest of a financial advisor. Requiring financial advisors to be licensed does nothing to fix that problem. Indeed, it may cause ordinary investors to be overly confident, “If this guy is licensed, he must be eligible.”
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