First off, I have to say that there are many fully capable financial advisors out there who spend countless hours studying, learning and otherwise educating themselves to be competent and knowledgeable professionals. However, given the 60,000+ 100,000+ financial advisors in Canada, not all are created equal and I think many investor advocates would argue that most advisors are just salespeople as opposed to fiduciaries.
Perhaps part of the problem is that while professionals in other lines of work require a significant investment not only of their time, but also of their money in the pursuit of the credentials required for their particular vocation, to become a mutual fund salesperson in Canada requires little of either.
As a comparison, if you want to become a lawyer or a doctor requires undergraduate schooling and graduate studies. It can take perhaps 8 to 10 years of education and tuition and ancillary expenses of $100,000 and more are not unheard of. On the other end of the spectrum, if you would like to sell mutual funds for a living requires:
- $375 for taking the online Canadian Investment Funds Course
- $50 for 1 textbook (optional)
- That’s it
As for the admissions requirements, quoting directly from IFSE’s website: “Admission into any of www.IFSE.ca’s programs is open to all individuals. There are no academic requirements for entering the Investment Funds Program.” Last time I heard, the pass mark was 60%.
To be clear, there are many advisors who got their start with this course who are fantastically professional advisors, and have since gone on to further financial education and credentials. There are even fantastic advisors who have this and only this course under their belt. However, with such minimal requirements for financial advisors in general it is plain to see why it seems so hard to find a good one.
Preet,
Thanks for bringing to light the lack of training required to become a mutual funds salesperson.
Based on this info, it’s not surprising that the Mutual Fund "Specialist" at my local bank said that she never heard of E*Trade!
Great post, Preet!
According to the MFDA and IDA (these are the self-regulatory organization responsible for policing the industry), there are over 100,000 financial advisors in Canada. Currently, the MFDA has over 70,000 licensed mutual fund dealers, while the IDA has over 30,000. These are just the licensed ones, too. Needless to say, an argument can be made that financial advisors make up a very saturated industry, where point of entry is quite easy. Academically, the IDA only requires two courses, the Canadian Securities Course and the Conduct and Practice Handbook, while as Preet pointed out, the MFDA requires even less.
Preet makes a legitimate point that there are good advisors that have only fulfilled their licensing requirements. However, all things being equal, the more professional designations and academic background your advisor has, the better. That being said, just because an advisor reads about integrity and ethics…doesn’t necessarily mean he’ll adopt it as his or her morals. This is, especially, true given the revenue-driven culture of the retail investment industry.
Good advisors can be a challenge to find and assessing them can be even harder. Every advisor (well, every advisor who is going to make it in this business) has a great deal of people skills, and, if they’re doing their job right, you’re going to think they are the best thing since the invention of the printing press. With the ABCP debacle fresh in my head, I say tread carefully.
Zahid Jafry
Onus Consulting Group
Wow, 100,000 financial advisors – didn’t realize it had gotten up to that amount. I should be able to sell at least 100,000 copies of my book then. :)
Thanks for the informative follow up Zahid!
I wonder if an adviser is responsible (at least ethically) for stopping or warning you about a “bad’ investment or a “bad” time frame for investment transaction, which a person is about to make. Or, it is OK to act as a broker – just buy or sell based on your request. Even on TV, I’ve almost never heard that a financial adviser said: “Fundamentally, this is a good stock, but we are going to buy it later, when the technical indicators will tell us so”. In oppose, it’s always like this: “if a stock is good – you can buy it at any time”. Sometimes, this stock is in downtrend or at a reverse point and technically has a long way to go down… How it is possible to mislead an average investor?! Also, is there any Adviser’s Association Committee, which is supposed to establish and maintain educational norms and ethical rules?
Great post. I believe that greater qualifications is one side of the equation. The other side is regulation and deterrence; there isn’t enough of it. Do investment advisors get spot audited for irregular transactions or do the brokerage houses have to hand their own over to the regulators? Lawyers have spot audits every 5 years regardless of your financial management record; there is a move towards "practice management" audits (the law society basically looks at your practice and gives you advice on how to run your practice properly). In other words, the regulators are all over us.
Can the same be said for the financial industry?
Yes and no. There is a tremendous amount of compliance for all accounts – the applications need to get reviewed by the branch manager and these days, anytime trades or investments in an account don’t match the risk profile on the account, the clients need to sign forms indicating a change in their risk tolerance.
Managers get commissions too (a percentage of their advisor’s pay), so they are incentivized to approve more trades – not to say that managers are crooks, just pointing out a conflict of interest.
The procedures seem more geared towards preventing lawsuits than anything. Perhaps that is why it would be a good idea for more people to take the onus of educating themselves on at least the very basics, because no one is going to care more about your money than you.
I wonder what the future for this industry is. Some of the smartest minds in finance are getting hammered (hedge fund managers), so why would we expect a simple advisor to be able to give us good advice? There’s not much point using a broker that doesn’t advise whe discount brokerages are a lot cheaper to accomplish the same function.
I guess the real question is, does the general public know this, and if so, are they willing to take their financial future into their owns hands? If yes, say goodbye to a large percentage of those 100,000 financial advisors.
Re Zahid’s comment about ABCP. This is a case where an advisor could be harmful. Most investors won’t buy something they don’t understand, unless they are convinced to do so. I invest for myself, and I keep it simple. Financial advisors could talk you into the newest fad, which is complicated, untested and dangerous.
The industry has to move to being more like that of lawyers, doctors and accountants – years of training, no commissions. Strictly fee for service, or hourly.
There should be very little link to products or transactions. That way you could keep having money managers earning a percentage since capital flows will dictate where investment money goes (not tied selling). With no incentive to use mutual funds or what have you, you might find less money flowing there. That side of the industry’s comp will sort itself out if we sort out the advice delivery platform.
Preet
Hey, can anyone tell me where I can get this textbook? I want to start studying to take the exam. Thank you.
http://www.ifse.ca
I am one of those statistics of being a financial advisor for a well reputable company within Canada. As much as I want to disagree with this article I actually cant. There is a long list of people who have become or looking to become a financial advisor. I also am only 25 therefore it is some what hard to get clients to look at you like you might know the financial world better then they do. I simply have my mutual funds license and LLQP (ability to sell insurance to clients) however being a financial advisor is much more then simply coming in Monday – Friday 9am – 5pm and trying to get prospective customers to give you their hard earned money. You must associate yourself with the world of business and finances and try very hard to learn the world that you’ve decided to call a career. You need to watch television, you need to read ( and I mean a lot of reading) and learn the world that we are in. After 2 years of being in the financial world you can try and obtain your CFP and I truly believe thats when you can call yourself a Financial Advisor because until then you simply are a sales person trying to get clients to build your own business. The one thing I can say to people who are in this field is strive to try and become knowledgeable about the world of finance. Stock Market, Mutual Funds, Gic’s, anything that looks some what relevant to the world your in then read it. There is no such thing as too much reading in the financial world. Even if it is a article on E trade haha. Know it. The other final piece of the puzzle that I truly believe is be in it to help your clients not for yourself. If you can help your clients with the questions they have and seriously give your best effort to help them then you will be fine. However if you dont know the answer to their question DONT LIE and act like you do because you dont want to be on the spot looking stupid. Simply tell them your not 100% sure of the answer and dont want to risk their money until your 100% sure you have the right answer and follow up with someone who has the right answer. Be as truthful and act with the best business ethics you possibly can and the compensation will be there in the end.
Thanks for this extremely insightful piece. It is so helpful. I am a recent graduate and planning to become a financial advisor. It’s really tough to know how it’s really like to actually become one without any experience in this field. The only thing I know about this career is from watching movies, such as Wall Street. I dreamt about making millions of dollars off of managing other people’s asset. I thought the money would come easy, but after some research, turns out that I am dead wrong. It will be really tough for young graduates trying to convince people that they are trustworthy. I like what you said, business ethics is really important, and as long as you have that, that you truly care about your clients, compensation will definitely be there in the end.
Many of my clients I sit down with are ibankers and yes even hedge fund managers. When I originally entered the industry many moons ago I was shocked by just how little these guys actually know about finance and how to manage their own. You see even an average advisor should know a great deal more about what options are out there and capable of being a catalyst for others. Even those working in the finance industry. A good advisor however will not only have a very broad knowledge of all assets classes available but also have their own specialist area. (for example mine has always been bonds – I challenge almost anyone to tell me something about bonds that I dont already know)
I agree with a previous post that people really do need to do some home work on managing their own money. I much rather deal and talk with more sophisticated investors and bounce ideas. It makes my job interesting. Obviously I did make the assumption when dealing primarily with ibanking clients they would no a thing or two about finance and be a little more sophisticated then your average retail client. I could not of been more wrong :)
You’re right, not all advisors in the world of personal finance are created equal; nor do most claim to be. A point must be made that you often get what you pay for, and to that end, I find this post slightly misguided.
“Selling mutual funds for a living requires:$375 for taking the online Canadian Investment Funds Course$50 for 1 textbook (optional)That’s it.”
“As a comparison, if you want to become a lawyer or a doctor requires undergraduate schooling and graduate studies. It can take perhaps 8 to 10 years of education and tuition and ancillary expenses of $100,000 and more are not unheard of.”
1) Mutual funds are constructed and managed by professional portfolio managers who have a breadth and depth of expertise, amassed often over decades of schooling, personal and professional work experience, which come at a heavy price (comparable to that of a lawyer or doctor – think MBA). The financial advisor is available to gather and synthesize both quantitative and qualititative data using the appropriate tools, effective communication and knowledge of the stages of financial planning to identify the investor profile, which in turn is suited to different mutual funds based on their pre-determined/stated risk tolerance, and objective.
2) If one desires an advisor that is comparable to the “lawyer or doctor” you’ve identified, that option is certainly available, but at much greater cost, similarly to the cost one can expect when they acquire personalized/specialized services from a doctor or lawyer. In most cases, one must pay fees whether or not the treatment/verdict is to their full satisfaction or even favourable.
3)….. Need I say more?
Actually, with investing you often get what you don’t pay for, to paraphrase Jack Bogle. So we disagree on the premise from which you base your argument.
To your first point, you assume everyone needs an actively managed mutual fund. That’s the driver of cost in the first place since many advisors are compensated through embedded fees.
To your second point, a PM is available at lower costs than standard mutual funds. Fee based advice with DIY passive indexation also would be cheaper in many cases.