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  • Steven Lee

The Professional Status of Financial Services, Part I

Updated: Dec 26, 2019

Several years ago in my MBA program, I came across an article citing a study that found Americans trust Uber drivers more than financial advisors. This was alarming due to an important difference between the two: Uber drivers do not pretend to be a profession. Technically, the term used in the study was "financial brokers," but that is an amalgamation between "stock brokers" and "financial advisors." The central problem is that financial services encapsulates so much that it is difficult for consumers to know with whom they are dealing. In addition to stock brokers and financial advisors, there are also bank tellers, loan officers, CPAs, and insurance sales persons who comprise the industry. In this post, I sift through the web of complex relationships and confusion surrounding financial services and financial planning with respect to professionhood.


The Definition of Profession

In a paper I originally wrote two years ago and uploaded to SSRN over the summer, I constructed a meta-analysis of the profession literature to identify common characteristics of vocations that we as a society common refer to as professions: teaching; medicine; law; the military; etc. The four main identifiers of professionhood are knowledge, admission; organization; and ethics. These four pillars are critical to a profession; They come to mind when we think of the term. Let's look at each element in turn.


Knowledge

A profession houses a common and ever-evolving body of information. While specialized knowledge exists, all practitioners within the profession are expected to know the basics and routinely apply that knowledge to their practices. This knowledge is usually obtained through a combination of formal schooling and self-study. It is broad enough such that it encompasses all the major areas within the profession and deep enough so that lay persons cannot simply look it up on the internet. Moreover, the knowledge deepens with experience, underscoring the importance of skillful interpretation of facts coupled with masterful application of technique to suit the client's needs.


Admission

All of your traditional professions each have one path of entry through which all neophytes must enter. All attorneys must register with the state bar and pass its examination. Medical doctors must comply with all entry requirements of the state board. Teachers must be credentialed. Most professions share the following process for admission: obtaining the proper level and amount of education to acquire the knowledge base; logging a certain amount of hours "on the job" much akin to apprenticeships that rose to fame in the medieval period of human history; passing a formal examination that demonstrates mastery of knowledge as well as understanding of practice standards and expectations; and affirmation of a creed, oath, or set of ethical standards.


Organization

Typically, each profession is governed by a single organization, although in certain cases there is a split between the regulatory body and the trade organization. Regulators make rules regarding the conduct of practitioners as well as discipline those who violate them while trade organizations educate, train, and advocate for its members. Accountants are good examples of this. The Securities and Exchange Commission (SEC) regulates their auditing functions of public companies, but their continuing education as well as lobbying and other benefits come from the American Institute of Certified Public Accountants. Moreover, for certain matters, there is also the state board of accountancy. What is peculiar about accountants is that the SEC only regulates those who practice in the United States while the AICPA has members worldwide.


Ethics

Professionals agree to live by a set of standards, and these standards are made available to the public. It is clear which conduct is prescribed, proscribed, mandatory, and optional. All members of a profession agree to be bound and held accountable to its ethical code. Ethics provides the spirit of the rules that regulators and trade organizations govern and influence practitioners. Rules can be bent and interpreted many ways, but ethical precepts tend to be more insightful in discerning whether there was any breach of behavior on the professional's part. It is something that a consumer can point to and say, "That person promised to abide by this commandment, but (s)he did something else that was contrary to it." It should also be noted that trade organizations often operate at a lower threshold than regulatory bodies. Regulators are concerned with whether a rule or law was broken, and in criminal matters, the burden of proof is beyond a reasonable doubt. In civil matters, at least in the U.S., the burden of proof is preponderance of the evidence--that it was more likely than not that the practitioner did wrong. By contrast, a trade organization will often look at the conduct and take action if the member's action resulted in damage to the organization's reputation. Part and parcel of a profession is that a single member's misdeeds can negatively affect all other members and their business.


Concluding Remarks

Financial services--largely because of the wide variety of sub-industries contained within it--fails to meet the definition on all four fronts. There is not a common base of knowledge that a banker, trust attorney, and stock broker, for instance, will know. After 9/11, with the passage of the Patriot Act, one may argue that there are certain rules training such as anti-money laundering (AML) in which everyone in financial services receives, but that is not technical knowledge involving technique. It is more about asking questions to ensure that the government's interests are protected. There is no single point of entry nor is there a single organization to which each practitioner must answer. Even within the realm of tax professionals, attorneys are subject to rules of the state bar, enrolled agents answer to the IRS, and CPAs to the board of accountancy. Not all exams are created equal with some boasting near perfect pass rates while others can be well below 50%. Within some areas of financial services, you can begin with virtually no requirements while others require a college degree, hundreds of hours of practical experience, and a clean background check. The ethical expectations among financial service practitioners varies greatly. Even within the investment world, some reps must follow a suitability standard (in selling a product, ensure that the customer fits the profile for which the product was created) whereas others are held to a fiduciary standard (always act in the client's best interests).


Part 2 of my blog mini-series focuses on financial planning--a subset of financial services. There, I analyze various factors to determine whether financial planning is any better off when it comes to professionhood. While the certified financial planning (CFP) collective possesses the four elements I described above in this post, other factors challenge the notion of profession when it comes to financial planning.



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