I often wonder why financial advisors need a license. Perhaps the government believes that these regulations protect the public from making bad financial decisions. But what is a bad financial decision? Is buying a managed stock fund a bad decision for the average person? What about an indexed fund?
Perhaps the government is concerned that unregulated financial advisers could give bad advice, for example by encouraging people to believe that buying lottery tickets is a good way to get rich. On the other hand, if that were the motive, why would government officials offer this? this kind of advice:
Lottery officials announced Monday that starting in April, it will cost $5 to play Mega Millions, up from the current $2 per ticket. The prize increase will be one of several changes to Mega Millions that officials say will result in improved jackpot odds, more frequent giant prizes and even bigger payouts.
“Spending five dollars to become a millionaire or billionaire is pretty good,” said Joshua Johnston, director of the Washington Lottery and chief executive of the group that oversees Mega Millions.
Does Joshua Johnston offer good investment advice? Is he a certified financial advisor?
On a more serious note, I suspect that the factual The motive behind the licensing requirement for financial advisors is the same as the actual motive behind all other professional licensing restrictions: to protect incumbents from new entrants.
Some would argue that the Bernie Madoff scandal demonstrated the need for licensing requirements. Actually, that case showed the exact opposite; licensing requirements do not solve the central problem in financial services, namely moral hazard.
Based on what I’ve observed, the main problem in the financial services industry isn’t that unlicensed professionals are recommending the wrong stocks. They are licensed professionals who encourage their clients to invest in a way that benefits the financial advisor. Requiring financial advisors to be licensed will not solve this problem. It could even tempt ordinary investors into overconfidence: “If this guy is licensed, then he must be qualified.”