The stock market, all procedures for the buying and selling of securities, for issuing new share capital, for handling cash, for selling and marketing mutual funds and insurance products and much more are all highly regulated and the regulation highly detailed.
The rules, regulations and requirements for the efficient working of the stock market are all detailed in the securities acts, national instruments and the self regulatory organisations own rule books and communications.
The reason for this regulation is that without the confidence in the integrity of the stock market, the central cog of capitalism would fail. The stock market is essential for companies to raise capital and for investors to be able to buy and sell securities.
While the buying and selling of securities and products are highly regulated and, necessarily so, the regulation of financial advice is extremely limited. Indeed, there are no real clear distinctions as to what constitutes good or bad advice.
Providing an advisor has made an attempt to “know the client” and providing the product or securities’ solution is “suitable” to the investors needs, objectives and risk preferences, then the advice is deemed acceptable.
One problem with regulating advice is that every individual investor is different and every provider of financial advice has a different approach and rationale. There are many potential solutions for each problem.
Another problem is that hitherto securities regulation has focussed on products and transactions and the suitability requirements of a product or transaction are much narrower than that of overall financial advice, likewise the delivery infrastructure and basic training.
Within an overall advice context, asset management or investment product recommendations can only be made after the clients financial needs, existing financial assets and long term financial modelling have been undertaken. Such a requirement is far too complex a solution to provide for an infrastructure and a business model built around transactions and product sales.
Regulation is needed to ensure that proper investment planning processes are followed when constructing, planning and managing portfolios to meet needs over time. To date no such regulation or the consideration of the necessary principles of such regulation have been considered.
Too many investors’ financial security is still adversely and unnecessarily affected by inappropriate advice.