Another Area of Financial Regulation

If I want to buy a gun I must possess a PAL. (Possession and Acquisition License)  Holding the license allows me to acquire a firearm and ammunition.  Without it I may acquire and/or possess neither.  The reason for regulation is the person who has the ability to own a firearm and acquire ammunition must be a person who understands how the weapon works and who is familiar with operational safety and storage.

In this context, personal responsibility is the ability to prevent harm to one’s self and to others.  It is a reasonable condition precedent to being a functional member of society.

There are others though, who have no intention to behave so as to prevent harm to others and to themselves.  They avoid the process.  Rules affect behaviour only among those who accept the idea of rules.  The others are unregulated in any meaningful way until much later.  There may be a price later, but that is uncertain and it is later.

When the user is unregulated, there is little hope of predicting their outcome.  It makes little difference how strongly you police the vendors or the purchasers of firearms and ammunition.  If some want to avoid common sense rules they will do so and society will be the worse for it.

Similarly with investment products.  If the client knows nothing and intends to know nothing, how can you make the advisor responsible for decisions that turn out poorly?  An advisor could be the supreme example of honesty, compassion and competence and still recommend things that turn out poorly.

The informed buyer understands that there is no guarantee of an up market and will deal with it successfully.  The uninformed will blame anyone but themselves, even though they contributed nothing but money to the situation.

In the broader financial planning context, should an advisor who is an inept salesperson, and who can sell only a third of the life insurance a client should have, be called to account for the shortfall after the die unexpectedly?

An advisor who deals with a poorly informed buyer is at risk, given that hindsight will be used to show whatever the courts want to show.  If the hindsight includes the client’s inability to understand the limits of the process, there would be fewer problems.  Intentional or negligent ignorance should not be grounds for a lawsuit.

While I think reasonable regulation of advisors makes sense if for no other reason than it supplies reasonable behaviour guidelines. Advisors should not deal with clients who do not understand what is recommended and how it works over a long time.  There is no level of advisor regulation that will protect this client from himself.

Perhaps, and it is a big growth area for regulation, the government should regulate the clients.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

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2 Responses to Another Area of Financial Regulation

  1. In my almost 20 years in the industry I have come to accept that part of our work as advisors is to teach.I still find time to do a comprehensive analysis for all my clients irrespective of their educational background or profession rather than rushing the sale.This helps in making the client understand the process and the recommendation.The companies should also invest in client education rather than spend a lot of money in product development and marketing and leave this important task to us advisors whilst they are expecting us to push the sales.For sustainable relationship and content clients it is better to have better informed clients who understand the process and what is recommended.I fully agree with you Don rather than regulating the already over regulated advisors an effort should be made to educate the clients.Thank you

    • A useful addition to the idea. If the authorities will not and probably cannot supervise the buyers, then the people who deal with them should make sure their clients are competent. Incompetent clients introduce considerable randomness into an advisor’s life.

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