Does either the securities industry or the SEC mandate any training program to ensure that advisors are competent to explain complex products and strategies? The answer is no. This is a clear sign of the failure of self-regulation within the securities industry. Minimally educated stockbrokers are selling these products with no SEC- or FINRA-mandated product training. In most states, one cannot get a driver’s license without demonstrating an ability to parallel park. Yet, somehow, advisors are permitted to sell complex, structured investment products without demonstrating comprehension of them.
In its January 2011 Study on Investment Advisers and Broker-Dealers, the SEC addressed the duties owed by investment advisors and broker-dealers. When it came to the subject of education, the SEC failed to suggest even a single change to the current system related to either educational prerequisites or continuing education. Instead, the SEC focused on investor education.
Recognizing that many retail investors “may not have the time, information, market sophistication or access needed to represent themselves effectively in today’s complex capital markets when pursuing their financial goals,” the SEC expressed its support of programs to support the “financial literacy of retail investors.”
The SEC missed the mark. While the financial literacy of retail investors is important, the greater focus should be on educating the advisors. Systems based upon the blind leading the blind are inevitably unsuccessful.
David A. Weintraub is a securities attorney with offices in Plantation, Florida, and New York, N.Y., who represents retail and institutional investors throughout the United States.