A new round of regulations in Australia may deem that only 25% of financial advisors in that country are “competent” according to their new Competency Standard. If that same requirement was in effect in the United States, would your advisor meet this standard, or would they be forced to change careers?
Here are four ways to determine if your advisor would meet the standard.
Since the Department of Labor passed new regulations (the infamous DOL rule) in the past year, the financial services industry has gone through quite a bit of a “cleansing.” This rule has brought greater transparency with regard to reporting commissions to clients, lowered fees in certain investment products, and a established a fiduciary standard by which advisors must operate. These are all good measures to help improve an investor’s experience and in theory, better outcomes.
From our perspective, we are happy to see these changes. As a Registered Investment Advisor (RIA), our firm already operates with a fiduciary standard, which means we are legally required to operate in our clients’ best interests as if we were the client. Additionally, most of the investments we have used for clients are the lowest-cost institutional share class mutual funds or low-cost exchange-traded funds. If we offered investment products that paid commissions instead, we have always tried to be fully transparent with our clients as to their costs, and why we feel they would best fit our clients’ needs.
Our hope is that, with these new changes under the DOL rule, the “bad apples” in the financial services industry are forced to find new careers. However, just because an advisor might comply with these new regulations, it does not necessarily mean they are “competent” to give advice.
In this article, Michael Kitces analyzes the proposed regulations in Australia, and more importantly, compares them to current standards in the United States. The new Australian rule requires that all financial advisors must:
1. Have a college Bachelor’s degree
2. Have a full year of professional work experience
3. Pass a comprehensive exam to demonstrate their competency in core knowledge domains, and
4. Commit to ongoing continuing education and ethics requirements.
Notably, this is the exact same framework outlined by the Certified Financial Planner (CFP) Board’s “Four E’s” requirement that already exists in the US:
- Experience, and
Currently, only 30% of all financial advisors in the U.S. are CFPs. Far fewer have additional professional credentials. And of those, we are guessing that only a fraction are legal fiduciaries (e.g. RIAs).
Karin and I have both been CFP’s for over 15 years. Additionally, Karin is a Certified Public Accountant (CPA), and I am a Certified Estate Planner (CEP). We have always taken pride in having achieved those professional designations, but more importantly, we are grateful for the additional knowledge gained to help us serve our clients better. And our firm became an RIA firm, making us a legal fiduciaries, in 2016.
The equivalent of our DOL rule took place in Australia 5 years ago. If their professional rules are an indicator for what regulation is to come in the U.S., Australia’s adoption of new competency standards for financial advisors may be the next regulatory focus in the US. Our team is ready for it. Is your advisor?