I’ve often wonder why financial advisors need a license. Perhaps the government believes that this regulations protects the public from making bad financial decisions. But what is a bad financial decision? Is buying a managed stock mutual fund a bad decision for the average person? How about an indexed fund?
Perhaps the government is worried that unregulated financial advisors might offer poor advice, such as encouraging people to believe that buying lottery tickets is a good way to get rich. On the other hand, if that were the motive then why would government officials be offering this sort of advice:
Lottery officials announced Monday that it will cost $5 to play Mega Millions, beginning 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 result in improved jackpot odds, more frequent giant prizes and even larger payouts.
“Spending 5 bucks to become a millionaire or billionaire, that’s pretty good,” said Joshua Johnston, director of the Washington Lottery and lead director of the group that oversees Mega Millions.
Is Joshua Johnston offering good investment advice? Is he a licensed financial advisor?
On a more serious note, I suspect that the actual motive behind the licensing requirement for financial advisors is the same as the actual motive behind all other occupational licensing restrictions–the protection of incumbents against newcomers.
Some would argue that the Bernie Madoff scandal showed the need for licensing requirements. Actually, that case showed the exact opposite; licensing requirements do not address the central problem in the financial services industry, which is moral hazard.
Based on what I’ve observed, the primary problem in the financial services industry is not unlicensed professionals recommending the wrong stocks, it is licensed professionals encouraging their clients to invest in a way that benefits the financial advisor. Requiring financial advisors to be licensed does nothing to fix that problem. Indeed it might lull ordinary investors into overconfidence, “If this guy is licensed, then he must be qualified.”
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