Is it Too Easy to Become an RIA?

Financial planners have long been considered one of the most corrupt groups of professionals in the financial industry. Whether this is really true or not is another issue, but the fact is that the entrance requirements for becoming a Registered Investment Advisor (RIA) are barely a blip on the radar screen compared to those of other prestigious occupations such as law, medicine or accounting.

If you want to become a Registered Investment Advisor, the bar is set fairly low. All you have to do is pay a $165 fee to the Securities and Exchange Commission (SEC) and then pass a three-hour Series 65 exam with a score of at least 72%. Once you have accomplished that, you will receive your RIA license and are free to begin recommending securities, analyzing and managing client portfolios and functioning as a financial planner. The test itself covers securities laws and regulations and almost nothing pertaining to investments, insurance or the myriad of other topics that financial planners must understand in order to do their jobs effectively. (For more, see: Introduction to the Series 65 Exam.)

This is one of the reasons why there is such a high incidence of disciplinary issues in the profession, because unethical persons who wish to defraud clients have virtually no real hurdles to overcome in order to get their licensure. In fact, this license does not even have continuing education requirements like most other licenses. A comparison of the requirements to become an RIA and those of other professions is almost laughable. A CPA must take at least 30 hours of undergraduate accounting classes and then pass a rigorous four-part exam that covers accounting, auditing, bookkeeping and taxes. Doctors and lawyers need several years of schooling and must also pass a board or bar exam in order to practice. The argument has been made that RIAs and other financial advisors such as brokers should have to obtain a similar level of education before they are allowed to handle other people’s money.

One of the most obvious ways that advisers who wish to prove their worth to their clients have available is to obtain a professional certification or credential such as the Certified Financial Planner (CFP), Chartered Life Underwriter (CLU), Chartered Financial Consultant (CFC) or Chartered Financial Analyst (CFA). These credentials require a certain amount of coursework in such areas as investments, insurance, taxes, retirement and estate planning. The CFA coursework covers investment analysis, financial accounting and other topics related to portfolio management. The CFP and CFA designations also have one or more rigorous exams that must be passed in order to become certified. (For more, see: Financial Designations Aren't All Created Equal.)

These designations also come with continuing education requirements that the bearers must complete every year or two in order to keep their designations active. The CFP mark also requires practitioners to adhere to a strict code of financial ethics in all of their actions. Carrying one or more of these credentials can show clients that an adviser is committed to acting ethically and in their best interest and has also received a certain level of training and education in the profession. Unfortunately, advisors are not legally required to obtain any of these marks, although some of those who don’t have received other types of training, such as a bachelor’s degree in finance, accounting or economics. And RIAs are bound by a fiduciary requirement in the same manner as most credentialed practitioners, although this may become much more complicated once the Department of Labor’s (DOL) fiduciary rule becomes law.

Imposing stricter entrance requirements on RIAs could help to elevate the level of service that is provided to the public. It would also help to screen out lazy and unethical entrants who would not be willing to take the time to pass a rigorous board exam or complete the necessary coursework. Despite its sometimes tarnished image, the public still views financial planners of all stripes in essentially the same category as doctors, lawyers and accountants. If this is the case, then the industry should have entrance criteria similar to these other professions. (For more, see: Financial Planner: Career Path & Qualifications.)

There should also be continuing education requirements for current RIAs, although it would probably not be fair or practical to require them to go back now and satisfy a higher level of entrance criteria. But they need to stay abreast of new developments in the profession and the ever-expanding selection of investment and insurance choices that are now available in the financial marketplace.

There is currently no legislation pending that would raise the bar for entrance into the RIA profession. This change will likely be slow in coming, regardless of who is elected in November. But raising the bar for RIAs could have several benefits for both advisors and their clients. (For more, see: The Alphabet Soup of Financial Certifications.)