So to summarise, what is my big picture take away from the recent IFIE-IOSCO conference?
I am a big believer in education and in learning. But am I a big believer in investor education per se? Well, it depends on just what you define by investor education and just what is its purpose.
Education and literacy have a place but should not be used to enforce investor responsibility within impaired regulatory frameworks. Recent moves to introduce best interest standards, higher standards of professionalism and the removal of conflicts of interest in international jurisdictions are effectively an acknowledgement of a) the failure of education and disclosure initiatives and b) the limitations of a transaction based system with limited advisor responsibility.
If you are an industry that sells products and other transactions, then you want to be able to focus on the transaction, in other words, selling as much as you can. If you are forced to educate investors over the risks of investment and the product, then you a) risk increasing the time it takes to sell and b) risk increasing the probability of not selling at all.
If you are a regulator and are having a lot of negative feedback about investors not understanding the risks of investment and complaining about suitability and outcomes, then you might want to make sure that the investor learns more about risk and products, so that this will not happen.
This is about making sure that investors take responsibility for the investment decision within a service framework that is incapable of delivering suitability in its more appropriate and investment relevant context.
Transaction based suitability, at its very lowest level, is about making sure that a product or transaction can fit within the space defined by risk profile, investment objective, investment expertise and possibly, if the parameters allow it, time horizon. This assumes a lot – it assumes the investor is able to understand the limitations of the process, it assumes the investor has their own suitability process (which they will need to incorporate transaction recommendations into their overall asset position) and it assumes that the investor fully understands the risk profile and dynamics of the transaction, both in terms of the transaction and how it relates to the portfolio. This is a very tall order. And for the vast majority of investors is an impossibility.
Investor education in this context is both impaired and conflicted. It is impaired because it can never deliver investor ownership of the suitability process and it is conflicted because its objective is one of improving the efficiency of the regulation of the status quo, yet it never communicates this objective to the investors it intends to educate.
The intent of the education is not transparent to the investor and I think it should be. I have argued long and hard for full transparency over just what investors are responsible for and not, because, in Canada, the responsibilities of the services offered and the services themselves are being misrepresented.
Recent moves to introduce best interest standards, higher standards of professionalism and the removal of conflicts of interest in international jurisdictions is effectively an acknowledgement of a) the failure of education and disclosure initiatives and b) the limitations of a transaction based system with limited advisor responsibility.
Education within a framework that delivers best interest/fiduciary type standards, that places responsibility on the adviser/firm for the process and the communication/education of that process is valid.
Education and literacy have a place but should not be used to enforce investor responsibility within impaired regulatory frameworks that support impaired suitability processes.
My views on investor education and the misrepresentation of the transaction based service process are well known. But I have not clicked on specifically to the (pernicious?) risks to investor financial well being that regulatory driven education, at times, can pose. Reading Lauren E Willis’s work on such risks has been important in sharpening my focus on this particular issue. I think her views are very very important.
No matter where we go or what we do, we cannot escape the limitations of the framework in which we operate. Structure first then content, then communication! Anything else is nothing more than a new lick of paint.