Recently I was at a business function put on by the Seattle Chamber of Commerce. The event was set up for young professionals to meet each other and make connections. One of the people I met there was a young Asian-American woman, who told me a story I have heard many, many times. After finding out that I am a financial adviser, that I teach classes on personal finance, and that I take my profession very seriously, she told me that she had been recruited by a financial firm.
She found the recruitment attempt strange, and almost insulting. She had no experience with finance, and no desire to sell mutual funds. Furthermore, she was already a successful real estate agent. I told her that what happened was not at all unusual. Financial advisers can be paid in one of two ways–either by collecting fees from their clients, or by commissions from the products they sell. This woman had been recruited by a firm whose representatives sell commissioned products, and commission-based firms do not particularly care about experience. Their business model is to get thousands upon thousands of sales-people up and running. Most of the sales-people will fail and quit, but a few will be very good at selling and make the firm quite a lot of money.
It was particularly unsurprising that this woman was recruited given that she is an Asian-American professional. Commission-based firms go out of their way to recruit female sellers, because many women more easily identify with a female financial adviser, and the industry is still male-dominated. Also, Asian-Americans are considered especially good prospects because commission-based firms believe that the Asian market is under-served, and they believe (rightly or wrongly) that Asian-Americans will be more likely to do business with other Asian-Americans.
I have heard this young-woman’s story before, and I have heard it in many contexts. People often tell me, after they find out what I do, that they have been recruited by financial firms based on racial or gender profiling. And it is not surprising, given commission-based firms’ business models. These firms essentially throw as much spaghetti at the wall as they can, and hope that something sticks. The fact that most of the salespeople will get chewed up and spit out is not important to the firms.
The cost of becoming an adviser
Since the commission-based financial firms need an unending, steady supply of new sales-people, it would not be in their best interests for advisers’ licensing procedures to be strict or time-consuming. And not surprisingly, it is very easy to become a financial adviser. You don’t have to take any classes or obtain any degrees. You merely have to pass one test, and the test costs $265. Some minimal study is required, but two-thirds of the people who take the test at any given time pass. And of course, an applicant who fails the test can just re-take it later.
It is much harder to become a professional hair-braider
The difference between the licensing process for financial advisers and cosmetologists or barbers could not be starker. It takes over a thousand hours of school to become a licensed barber in many states, and it can often take 1600 hours to become a cosmetologist. The schools are not cheap, either. In most urban areas, a prospective cosmetologist can expect to pay $10,000 or so to get licensed, and the costs can run as high as $18,000.
The result, of course, is that there are fewer hair stylists than there would be otherwise. In particular, there are far fewer small neighborhood barbershops and beauty salons than there would be otherwise. And there are far fewer part-time manicurists, or hair stylists who make house calls. It is too expensive to attain the licensing required to run a part-time business. The result is not merely that there are fewer hair stylists, but that the diversity of establishments is reduced. There are fewer small businesses, and budding barbers are more likely to need to go to one of the very large established firms to even have a chance of building up a large enough clientele to justify their schooling costs.
Occasionally, licensing laws for hair stylists are justified by the claim that the chemicals used by cosmetologists might cause harm if used improperly. It is no doubt true that a hair stylist could harm a client by improperly using a chemical. However, the licensing laws applied to hair stylists also apply to anyone who wants to start a hair-braiding business, where no chemicals are involved. And let’s be honest here—it does not require one-thousand six-hundred hours of schooling to learn how to avoid causing chemical burns.
It is almost impossible to justify the high cost (in both time and money) required of prospective hair stylists if the primary concern is the health and happiness of clients who want their hair done. Such clients may feel that they lose more through the loss of diversity in the business as they gain in protection from incompetent barbers (assuming that a thousand hours of schooling really does protect clients in the first place, which it might not.)
However, it is very easy to explain the high cost of cosmetology licensing by looking at what is in the best interests of the largest, most dominant firms in the field. In fact, if you think that the primary purpose of the licensing requirements is to protect large, dominant firms from smaller, nimbler competitors, the requirements are not merely easy to explain. They are working as intended, and working very efficiently.