Although measures imposed in Britain to raise educational requirements for financial advisors have resulted in investors who are better served, they have also contributed to a continuing shortage of advisors that has made advice harder to access for many investors who are less affluent. With some Canadian provinces embarking on similar reforms, what lessons can the financial services industry in this country take from Britain’s experience?
Advisors in Britain have been required to meet higher educational standards since 2013, when a series of reforms known as the Retail Distribution Review (RDR) came into effect. Those requirements are set by the Financial Conduct Authority (FCA) and are administered by organizations that the financial services regulator has approved. That structure is similar to the one being proposed by Ontario’s Financial Services Regulatory Authority (FSRA), which will oversee the implementation of the new Financial Professionals Title Protection Act.
If the new model is adopted, it will give authority to a government agency for the first time to set educational and ethical standards for two of the most widely used titles in the Canadian investment industry: financial planner and financial advisor.
While there is broad consensus that raising professional standards has mostly benefited investors and the investment industry in Britain, issues remain. They range from a stubborn shortage of advisors – many who fell short of the new standards left the field, widening the advice gap, especially for less affluent investors – to creating “advice silos” that make it harder for some investors to obtain a holistic picture of their finances.
On the topic of silos, in particular, there are concerns that some advisors, especially those who practice alone or in very small firms, may be tempted to offer advice in areas in which they lack expertise, even though they are technically permitted to do so.
“People [can be] clingy with their clients. If they can’t advise on something, they are not very keen on handing them over to somebody else. So, [the British scheme] needs to have a more joined-up approach, with fewer knowledge gaps in between,” says John Somerville, head of regulatory relationships, professional education at the London Institute of Banking & Finance, which provides training programs for advisors.
However, for some in Canada, any upgrades are preferable to the current state of affairs, in which virtually anyone may set him- or herself up as a financial planner or advisor without the need for specific training or experience.
The lack of government-mandated credentials has led to consumer confusion and made it easier for fraudsters to flourish. As such, there appears to be a consensus that the new baseline competency profiles that FSRA has proposed for both financial planners and advisors is a sound approach.
Dan Hallett, vice-president, research, and principal at Oakville, Ont.-based Highview Financial Group, says that while the new rule should eventually become more rigorous and cover more titles, it takes a practical approach that’s welcome in an already heavily regulated sector.
“It does need to go further,” he adds. “It doesn’t need to go further right away, but it’s something they need to keep building on, to keep pushing in the direction [of higher standards].”
Members of Britain’s financial services industry view the standards that the FCA has set as appropriate, for the most part, especially as the regulator has the power to hand out tough penalties for those who violate the standards.
At the most basic, independent financial advisors (IFAs) in Britain – a special category indicating the advisor has no special relationship with any product provider – must complete Level 4 training. That standard is met after finishing a diploma course that generally takes less than a year. While that’s the bare minimum, IFAs are encouraged to upgrade their training to Level 6, which is roughly equivalent to completing the first year of a bachelor’s degree.
Level 4 is by far the most common, but Level 6 is generally viewed as more appropriate for serving clients with complex needs, such as those who need help with pension transfers and inheritance taxes. Indeed, Level 6 is now a requirement for advisors who take on the closely regulated task of advising clients who are transferring their pensions out of defined-benefit pension plans.
Both credentials require the successful completion of exams in areas such as government regulation, creating financial plans, and assessing clients’ risk tolerance. Both also allow candidates to work for financial services firms as they train, providing supervised opportunities to interact with clients and apply what they have learned as they go.
Mr. Somerville says that the changes have mostly been beneficial, particularly at the Level 4 standard, which is appropriate for clients with smaller accounts. (The FCA recently estimated that about 92 per cent of investors in Britain receive no financial advice at all because of its cost.)
“There is a huge space for Level 4 advisors,” he says. “It’s a good standard, it gets people into the industry, and helps provide advice to the masses, which is what we want.”
David Hearne, a certified financial planner with Financial Planning Partners Ltd. in Maidenhead, England, and a chartered fellow of the Chartered Institute for Securities & Investment, which sets professional standards advisors, says that raising educational standards for advisors was the right thing to do.
“The complexity and potential impact of good or bad advice requires it, plus it elevates the role [of advisors] toward other professions such as accounting and law,” he says. “That may help to attract new talent to the profession, particularly post-university, and extends the range of the profession, which is typically older than in the U.S. and Canada.”