By ROBIN POWELL
One of the highest forms of wealth, the author and behavioural expert Morgan Housel recently wrote, is having a career that allows for intellectual honesty.
That includes, he suggested, “being able to say, ‘I don’t know’ when you don’t know. Being able to speak critical truths about your industry without fear of retribution… And not pretending to look busy to justify your salary.”
Let’s face it, in terms of pay, financial services has been a good industry to work in over the last few decades. Asset managers have commanded generous salaries and bonuses — in some cases comparable with those of film and sports stars. Stockbrokers have also earned rich rewards, and, thanks largely to hefty commissions from product providers, financial advisers have built successful businesses with recurring revenue streams.
Financial professionals, then, are better placed than most to enjoy the highest forms of wealth. In my experience, though, there are many who aren’t fully able to savour the freedom and fulfilment that financial wealth should bring. And the missing element is precisely the one Housel identifies: a job that allows them to be completely honest, both with their clients and with themselves.
An industry built on a lie
The problem is, of course, that the investing industry is a built on a lie. As anyone with a passing acquaintance with academic finance will tell you, consistently outperforming the stock market is all but impossible. There may be people out there with the skill to do it, but your chances of identifying them early enough are very slim. Even if you do spot them, any value they add may still be entirely eroded by the fees they charge.
It’s taken far too long to reach this point, but most of us, at least on some level, now know these things to be true. Many financial professionals, though, continue to act as if they don’t.
There’s a fascinating paper, published in 2017, called Emotional economic man: Calculation and anxiety in fund management, which explores this phenomenon in asset managers. Researchers held in-depth interviews with 51 managers and found high levels of anxiety.
The essential problem was the pressure they felt to outperform when only a tiny proportion of fund managers do so over meaningful time periods. Rather than confront the problem head-on, the study found, the managers used “calculative techniques” to help them deal with the stress of having what is, in effect, an impossible job.
“Knowing… but choosing not to”
The authors concluded that “fund managers can be characterised as… ‘knowing’ but ‘choosing not to know’.” In other words, they know the truth, but, to manage their anxieties, they choose not to do so. They are, if you like, in deliberate denial.
But cognitive dissonance in the financial world extends far beyond fund management. Platforms and brokers know, or at least they should, that the best investors trade infrequently. But they have a commercial interest in people trading more, not less. So they make the right noises about patience and discipline, managing behaviour and investing for the long term. But their actions make it perfectly plain that their priority is the bottom line.
Financial advisers — at least those who actually bother to check their clients’ net returns — know how very hard it is to predict the future and to identify, in advance, the very few funds that will outperform for long periods. But they also know that most clients and prospective clients continue to labour under the illusion that it can be done.
Kicking the can down the road
Facing facts, and being completely honest with people, is seen as a risk — of loss of face or, worse still, clients and fee revenue. So all too often advisers shy away from awkward conversations. Kicking the can further down the road, and letting their clients believe the lie for a little longer, seems easier than coming clean about how it really works.
Except, in the long run, it isn’t. The truth is out: investment management isn’t rocket science. Advisers add value not by picking funds but by helping clients control their costs, manage their behaviour and, most of all, to live the lives they want to lead. And the best client relationships are built on trust, transparency and total integrity — saying what you mean and meaning what you say.
The sooner advisers accept that the better it’ll be for their clients and their businesses, but also for themselves. As Morgan Housel says, “a job that lets you be open and honest pays a bonus that’s hard to measure.”
ROBIN POWELL is the founding editor of The Evidence-Based Investor. He works as a journalist and consultant specialising in finance and investing, and as a campaigner for a fairer, more transparent asset management industry. He is the founder of Ember Television and Regis Media, and is Head of Client Education for RockWealth and Evidence-Based Advisers.
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