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Investment consultants need higher professional standards

I have confidence in my dentist.  This confidence is based on a combination of his practical experience, having been practicing since the 1980’s, and his degree in dentistry.  By contrast, the prospect of attending a dentist without a formal qualification or no practical experience fills me, and I imagine most other people, with horror.

In the world of investment consultancy the tangible evidence of competence that we expect of our dentists is in short supply.  Based on a recent survey by IC Select, only 48% of investment consultants have a professional qualification.  Whilst this appears far from ideal the position is actually much worse than the numbers suggest.  Several consultancy firms actually define the Investment Management Certificate (IMC), the basic competency certificate for investment managers, generally completed by investment managers before beginning professional exams, as a professional qualification!  If those people that only have the IMC were excluded then clearly the proportion that are ‘unqualified’ would be significantly higher.

The competence of those investment consultants without a professional qualification depends entirely on their practical experience.  This may have sufficed in years gone by, but the issues faced by pension schemes and the financial instruments used to deal with them have increased exponentially in complexity.  For example, should someone who has not completed a formal study programme in derivatives, be advising trustees on their use in hedging liabilities.  The potential for poor advice is significant.

I doubt that any trustee board would consider using an unqualified actuary, lawyer or auditor.  Even IFAs now have to pass a series of exams before being allowed to give investment advice to private individuals.  Why then are trustees so sanguine about the qualifications or competence of their investment adviser and why are the consultants themselves not worried?

Part of the answer may be that investment consultancy is not recognised as a profession in the same way as actuaries, the law or accountancy.  Unlike other professions with their long history, it is a new discipline that has only existed for around 40 years and, consequently, has no professional body to regulate standards.

Whatever the reason, investment consultants fill a role at least as critical to a pension fund as the actuary or lawyer and it should be expected that they have a similar professional qualification.  In my experience, and there are some notable exceptions, the best consultants are those that are qualified actuaries or those that have passed the Chartered Financial Analyst exams.  Perhaps this is not surprising given their greater theoretical underpinning to support their advice.

In the absence of the industry regulating minimum qualifications for investment consultants it is left to trustees to ensure that their adviser has the necessary competence.  I would therefore encourage every trustee board to look carefully at the qualifications and experience of their consultant before accepting advice that may be outwith their competence.  If trustees begin to do this, then the pressure on those firms providing investment consultancy services may be sufficient to lead them to ensure that all their consultants achieve a recognised professional qualification.

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22nd November 2012