There was a time, not that long ago, when financial advisers as we know them today didn’t really exist. Pension and tax advice came from accountants. If you bought shares you bought them via a stockbroker (who gave you advice along the way). Unit trusts came directly — you responded to advertisements or perhaps got your accountant to do it for you. Occasionally you used an insurance broker. And that was that. It wasn’t particularly complicated and as a result no one (your accountant aside) was officially qualified to do anything. Brokers and dealers didn’t take exams to prove their proficiency and no one really thought they should. In the June 1963 edition of the Stock Exchange Journal, a Mr H.H. West in a marvellous piece on the idea of compulsory qualifications stated that ‘if it could be proven beyond all reasonable doubt that the introduction of examinations would be in the interests of everybody concerned and the practical and administrative difficulties could be overcome’ then no obstacles should be put in its way. He was not convinced that this was the case. His final conclusion? Introducing exams would be no more than a ‘public relations gimmick’.
Not everyone agreed — in the US, professional standards of various sorts had been introduced at all stock exchanges; the Scottish Stock Exchange was thinking about doing the same; and it would be a pity, said the (now defunct) magazine The Statist, if ‘London were to let progress pass it by.’
But London did. In the US the SEC went on a regulation bender. In the UK nothing much happened. By 1964 Ken Hart of stockbrokers Barden, Hart and Blake was lamenting, again in The Statist, that there was ‘no professional body to which a man can turn for investment advice’. There were a few of what the magazine had started calling ‘investment counsellors’ who worked to define themselves as separate from dealers and brokers in order not to be associated with the ‘lurid history of bucket shops’. But they did so with no licence and no qualifications. Worse, a good few of them charged in what we would recognise as a pretty feisty hedge-fund manner today: they took 25 per cent of all investment returns they made for clients above the returns of the index. There was some call for specific regulation of these new counsellors (it would both ‘raise their standing’ and keep out ‘fringe operators’) but also a general acceptance that not only was the industry ‘too young’ for regulation (I love this idea) but that given the ‘log jam of bills’ at Westminster there was no appetite for it.
There are a lot of financial advisers out there wishing there still wasn’t. Regulation of those giving investment advice arrived in earnest in the 1980s with the Financial Services Act 1986, which insisted that every-one was authorised, informed about the products they were selling and offering best advice.
Nearly three decades of law-making later, most financial advisers would tell you that they have been all but buried by compliance. They also have to take quite a lot of very boring exams. The Retail Distribution Review, which came into force last year, introduced minimum standards for all advisers. This is needlessly complicated in that there are a huge number of different bodies via which you can take exams (the Chartered Insurance Institute, the Personal Finance Society, the CFA Society of the UK, the Institute of Financial Planning, the Pensions Chartered Institute for Securities and Investment etc etc) but it boils down to one thing: if you want to give financial advice, you really need to take an exam or series of exams that qualify you to Level 4 under the national Qualifications and Credit Framework (QCF).
How hard is it? The examiners will tell you that it’s about the same as doing the first year of a degree course. Level 3 (which used to be the minimum) is supposed to be A-level standard; Level 6 is a whole degree and Level 8 is supposed to take you to PhD standard. I’d quibble with the standards (if Level 4 has components of a degree in it, we aren’t talking about a very difficult degree) but you get the picture: the modern financial adviser is obliged to have a bit of a brain.
But that’s not all. He is then obliged to do Continuing Professional Development (CPD) every year if he is to maintain his Statement of Professional Standing (SPS), without which he can’t practise. This — the bane of every adviser’s life — means 35 hours of mostly active learning that he has to log on a central website and be prepared to submit to audit at the whim of his professional body. This regime hasn’t gone down well with everyone — ask around and it won’t be long before you find an older ex-adviser convinced it is just another ‘public relations gimmick’ to rehabilitate a slightly shamed sector in the eyes of an increasingly suspicious public. You’ll also find plenty to repeat Mr Hart’s comments from 1964 that good qualifications ‘will not necessarily produce good advice’ and to note that exams can’t create ethical behaviour: as (the very well qualified) Steve Wilson of Alan Steel Asset Management pointed out to me, they can just give you a ‘better class of crook’.
But despite the RDR meaning that I had to sit an exam myself — having promised myself many years ago that I would never take another — I think there is more to it than that. Get an adviser these days and you know that he is obliged to keep up to date with changes in the industry and that, while he could be a bit dim, he isn’t a total idiot. There’s further to go — I’d make the minimum Level 6, which would make becoming a financial adviser as hard as becoming a lawyer. But with every exam passed we are getting a little closer to professionalising what was once a very unprofessional industry. I can’t see the downside.