Why the investment industry needs continuing education reform

Continuing education (CE) in Canada’s financial services industry is in a disorganized state and in dire need of reform. There is no common standard for CE requirements among regulatory organizations and credentialing bodies, causing CE obligations to stack on top of each other rather than integrate. For advisors, this means more time and more money on satisfying industry obligations. The intended benefits of CE are being outweighed by their unintended burdens.

This compounding issue with CE has worsened in recent years as more advisors become dual-licensed to sell both securities and insurance and hold multiple designations for which CE is a requirement. Yet, despite all the recent discussions around reforms relating to inefficiencies, costs and the regulatory burden in Canada’s financial services industry, CE is not a topic among them.

Without reform and standardization, the issues with CE are likely to get worse before they get better. Three new rules making their way to the financial services industry all include CE requirements. Introducing more obligations around CE for advisors before addressing the underlying problems will only compound the issue.

The first is the client-focused reforms, a set of rule amendments being phased in through 2021 to support the fundamental concept of putting clients' interest first. These amendments will require registered individuals to complete mandatory compliance training on securities legislation, including training on the new rules around know your client, know your product, suitability determinations, and managing conflicts of interest.

Then, there’s the Financial Professionals Title Protection Act, which will require anyone in Ontario using the title of financial advisor or financial planner, or conducting activities related to financial advice or financial planning, to hold an approved credential in good standing. Approved credentials have yet to be determined, but they will all have a CE requirement.

Quebec already has similar rules in place, and the rest of Canada will soon follow. Saskatchewan has already started the process with the Financial Planners and Financial Advisors Act, which is modelled on Ontario’s legislation.

Finally, there are the new CE requirements that the Mutual Fund Dealers Association of Canada (MFDA) will soon be introducing. Dealing representatives, who make up the vast majority of the 78,000 approved persons under the MFDA, will be required to complete 30 credit hours of CE every two years. Other approved persons such as ultimate designated persons, chief compliance officers and branch managers will be required to complete 10 credit hours every two years.

That’s a big deal for the industry. MFDA approved persons represent about two-thirds of the approximately 120,000 registrants in Canada’s securities industry – and the new rules equate to more than a million new hours of annual CE requirements.

Approved persons would be right to ask, “How many of these new CE obligations can be covered with my existing CE obligations?” Unfortunately, the answer is not very clear because there is no common standard among provincial regulators, self-regulatory organizations and credentialing bodies that impose a CE mandate.

Without a common standard, advisors facing multiple CE requirements must navigate the ambiguity of how to satisfy the obligations of each regime efficiently. In many cases, advisors just end up completing two or three times as many CE credits as necessary out of an abundance of caution or fear of repercussions.

On the surface, that might not sound so bad. After all, advisors who are completing more CE requirements must be learning more and will then become better advisors, right? The reality, though, is that this is not the case. Under compulsory circumstances, learning becomes a perfunctory exercise – a mechanical routine that has a negative impact on retention.

Adult learners retain more information when they are self-motivated and self-directed to learn on their own terms. One way to create these ideal conditions is by reducing the friction that often accompanies the learning experience, like the ambiguity of multiple CE requirements.

Another source of friction with CE is the costs, of which there are two: the actual cost (purchasing courses, event tickets, travel expenses, etc.) and the opportunity cost (time).

The actual cost of CE is about $25 per credit hour, although that can range from free up to several hundred dollars. (To be clear, CE credits that come with an implied expectation to sell an asset manager’s product is not “free.”) Using $25 per credit hour as the benchmark, advisors with 15 to 40 mandatory credit hours a year will spend between $375 and $1,000 to obtain them – excluding any annual designation renewal fees.

Then there’s opportunity cost – or time measured by an advisor’s hourly rate. That figure varies, but using a rounded, if not conservative, hourly rate of $100, advisors will spend an additional $1,500 to $4,000 in opportunity cost every year.

If there are 100,000 Canadian financial professionals with CE requirements, then the total cost to the industry is between $187.5-million and $500-million annually. Without a common standard or proper integration, adding more CE requirements, such as those being introduced by the MFDA, to the existing requirements could represent an additional $125-million annual cost to the industry.

Let’s be clear: CE is right and good for the financial services industry. An educated industry is a prosperous one. But without fixing the underlying problems with CE, adding more requirements is akin to a hoarder ordering new furniture; it’s not going to sit well if you don’t clean your house first.

The original article was published in The Globe and Mail.