You may wonder why financial advisors need a license. Perhaps the government believes this regulation will prevent people 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? What about index funds?
Perhaps the government is concerned that unregulated financial advisers will give out bad advice, such as convincing people that buying lottery tickets is a good way to get rich. On the other hand, if that was the motive, why would government officials make such a proposal? advice like this:
Lottery officials announced Monday that starting in April, the cost to play Mega Millions will increase from the current $2 to $5 per ticket. The price increase is one of many changes to Mega Millions that officials say will improve jackpot odds, pay out huge prizes more often, and even give bigger payouts. .
“It’s pretty good to spend $5 and become a millionaire or billionaire,” said Joshua Johnston, director of the Washington Lottery and principal director of the group that oversees Mega Millions. .
Does Joshua Johnston offer good investment advice? Is he a licensed financial advisor?
More seriously, I suspect that: actual The motivation behind licensing requirements for financial advisors is the same as the actual motivation behind all other professional licensing restrictions: protection of established firms against new entrants.
Some may argue that the Bernie Madoff scandal demonstrated the need for licensing requirements. In fact, the case showed just the opposite. Licensing requirements do not address moral hazard, a central issue in the financial services industry.
From what I have observed, the main problem in the financial services industry is not that unqualified professionals recommending the wrong stocks, but that qualified professionals advise their clients on financial advisors in a way that is favorable to them. It’s about encouraging investment. Requiring financial advisors to be licensed will not solve this problem. In fact, it can lead ordinary investors to become overconfident: “If this person has a license, they must be qualified.”
