I sometimes feel like a voice in the wilderness as an advocate of evidence-based investing in the UK; TEBI has a much bigger following in North America than it does in Britain. But, thankfully, there are more people writing about it now than when I started.
One blogger I very much admire is CAROLYN GOWEN. Carolyn is Branch Principal at the London-based financial planning firm Bloomsbury Wealth, which is one of two strategic partners that support TEBI’s work in Britain. Although still relatively new, Carolyn’s blog, The Financial Bodyguard, is starting to gain traction.
In this in-depth interview, Carolyn explains how she learned about evidence-based investing and how it transformed her business. She also discusses the reasons why it’s taking the evidence-based approach so long to take hold in the UK compared to the US.
Overall, though, Carolyn’s message is a very positive one: investing and financial advice are well and truly changing for the better.
Carolyn, tell us briefly how you discovered evidence-based investing.
I wasn’t really aware of index funds or evidence-based investing at all until I joined Bloomsbury in 2003. I come very much from an active investment background. I started my career at Hargreaves Lansdown and every firm I worked for after that had operated an active management philosophy.
The first that I really became aware of EBI was when I attended Dimensional’s first Science of Investing conference in June 2003, and it was one of those “Road to Damascus” moments. It was two days, and I went into it with no preconceptions and no real understanding that there was an alternative way. I remember looking at my colleague Robert Lockie in the taxi afterwards and saying, “We’ve just got to do this, haven’t we?”
It just seemed like a no brainer. It’s one of those things that, once you’ve learned it, you can’t unlearn it. We knew Dimensional were going to launch their funds the following March and we basically had nine months to prepare for that. So we threw all our efforts into communicating with clients and coming up with a new investment strategy.
As you know, some UK advisers can be quite sniffy about Dimensional and the fact that you have to go on a course to become a client. But, in my experience, people who go on it don’t look back.
If you’re not open to considering an alternative point of view, then you’ve got no business advising anyone on anything, whether that’s investing or anything else. If your mind is so closed to alternatives, then you shouldn’t be doing it.
Although we adopted this evidence-based approach, we’re now constantly asking ourselves if this is still the best investment philosophy. We’re looking to see if there is any evidence that active management is a better solution for our clients, because ultimately all that matters is that you do the best for your clients. I couldn’t care less whether that’s index funds, or factor funds, or even active management. You just want your clients to have the best possible outcome, and you have to be open to constantly questioning what you’re doing and why you’re doing it, and whether it really is the best thing for your clients.
So what do Bloomsbury’s prospects say about evidence-based investing when you explain it to them?
I suppose a fair proportion of them self-select. They visit our website, they download our guide to investing; and they get a pretty good idea of where we’re coming from before they get in touch with us. So, I think a lot of potential clients sit and watch for a while before they reach out and make contact.
I have to say, in the initial meeting we have with clients, we don’t talk much about investment. It’s just about them; and it’s only in the second meeting when we present a lifetime cash flow and explain where we can help and where we can add value that we get on to talking about the investment side of things. We ask them to do a FinaMetrica risk profile, and a psychometric risk profile for that second meeting. We can then show them what our model portfolio for them would like, explain the underlying assets within it, and then a bit about the investment philosophy.
To be honest, I think it can take about three years to educate clients fully on the way in which we manage money and the whole philosophy behind it — rebalancing, keeping costs low, controlling what you can control, and gaining exposure to the returns that are there for everybody.
Ultimately, clients come to us for the financial planning and we explain that the investment management is just a means to an end. Most people are pretty agnostic. We do get the odd one that is very pro active management, and clearly, in those circumstances, we’re not the right firm for them. But most people either know what we do before they contact us; or when they contact us, they don’t have any strong views either way, and are happy to learn about a different way of doing things.
Evidence-based advice firms are still a minority in the UK — a growing minority, but a minority nonetheless. Why do you think that is?
I think there’s a number of reasons. Firstly, compared for example to the US, the UK has a large number of small firms, often just one guy running his practice. You’ve got an average age of 55, and so there’s the “old dogs, new tricks” scenario. There are people who want to believe that active management is the right way because they’ve held that view for so long.
I think there’s a significant element of people who, in their heart of hearts, know that an evidence-based investing philosophy is right; but they don’t know how to communicate that to their clients. It was interesting attending that first conference that Dimensional held, because that was a room full of people who were seeking an alternative. I think most of them came out thinking that it was the right way, but there were some who said “I don’t know how I’m going to present this to my clients, because it’s like admitting I’ve been wrong.”
To be honest, we didn’t have many clients at that point, so it wasn’t a massive problem. We were just completely upfront and said to people, “we know that the way we’ve been doing it isn’t the optimum way to manage your money, and we believe this way will produce better results.” They were 100% behind us, and we didn’t lose a single client as a result of making that transition. I think fear is a factor, though.
Lastly, there’s a vast industry that has a vested interest in keeping us in a minority. It’s not in the interests of the active fund management industry for the evidence-based philosophy to become more widespread, because it would be to their detriment.
One of the main ways the industry has kept its stranglehold over investors is that it has been very opaque about charges and about reporting past performance. How are investors supposed to make a sensible decision when they don’t know what the performance has been or how much it’s costing them?
Exactly, and those chickens are coming home to roost. Things are changing. The banning of commission has led to a little bit more transparency. But I suppose the big game-changer has been MiFID II, which requires us to disclose all of our costs. We’ve had the first report from the regulator behind MiFID II that states that costs do matter, and are probably the biggest differentiator in determining investment returns.
Now we’ve got the costs-and-charges statement, which will go to clients every year and show them exactly what they’ve paid to us, to the custodian, and every fund fee. So they see a total amount that they’ve paid, in pounds and pence, on a piece of paper. For the vast majority of UK investors, that will be the first time that they’ve ever seen, in black and white, what they’re paying.
The data is not easy to get hold of. We’ve been disclosing all of our costs for years, before MiFID II came in, because we thought it was the right thing to do. Finding out what people were paying before they came to us was virtually impossible.
It will be interesting to see what happens with these costs-and-charges statements. If you’ve got firms that are clearly flouting the rules and not disclosing costs, then what is going to happen? Presumably, the FCA will actually start clamping down on firms that aren’t complying; but until they do, if firms can get away with it, you’ve got to assume that they’ll continue to do so.
Gina and Alan Miller have been particularly outspoken on this issue. Their view is that the FCA has been letting down consumers by not getting tough. Would you concur with that?
Yes. It’s not like we didn’t know that this was coming. There was time to plan and do what needed to be done. It shouldn’t be the case that those of us who are doing the right thing suffer at the hands of those who choose to flout the regulations.
It’s like the mis-selling scandals. It’s always the good advisers that end up putting their hands in their pockets and paying for the sins of those who flout the regulations. It’s not right.
Bloomsbury is a member of GAIA —the Global Association of Independent Advisers. For those who aren’t aware of it, explain what GAIA is, and how membership of it has helped Bloomsbury as a firm.
It was born out of two large study groups — Zero Alpha Group in the US, and a study group in Australia and New Zealand. At a Dimensional conference some years ago, it was decided that they would form a global alliance on the basis that it’s about the wisdom of crowds and sharing experience.
There are pretty strict criteria to become a member. It’s invitation-only, and you have to meet a number of criteria in terms of having an evidence-based investment philosophy, and doing comprehensive financial planning. You also have to become a member of CEFEX — the Centre for Fiduciary Excellence — and that is a US firm that comes in and really audits what you’re doing and how you’re doing it from the point of view of being a fiduciary. So there is quite a big set of hurdles to get over to get in.
The benefits of being in the association are wide-ranging. We’ve seen a number of ways in which being a member has helped us. With any business situation that we might be struggling with, there will be a member firm that has been through the same and can offer advice and support.
We’ve had other situations where it’s helped. For example, we had a client who sadly died leaving a wife and young family, and when the wife moved back home with her children to New Zealand, we were able to introduce her to a member of GAIA knowing that they would deal with her in pretty much the same way as we did. There was, for her, as seamless a transition as possible.
We might be dealing with a client who is a national of one of these countries and there’s a tax issue, so we can ask members for help on that. Likewise, we get quite a lot of enquiries from people in Australia and New Zealand about the state pension system, because there are a lot of expats who are retired there and have state pension benefits that we can help out with. So it’s helpful in those ways.
Also, most importantly, GAIA holds us to account on how we decide to run the business — where we spend our money, how we try to grow, what methods we use to grow. Robert and I come up with the business plan. We have a finance director and a small management team. We use a business consultant to come in and tell us if we’re doing anything completely mad. But, on the whole, Robert and I ultimately decide and we’re only accountable to that small Bloomsbury management team.
What happens at GAIA meetings, which we hadn’t expected when we attended our first one, is that they all share and discuss their business plans, and get questioned quite hard! It’s done in a supportive way, but it does make you think. It’s somebody else holding us to account and questioning what we’re doing. That’s never a bad thing when you’re a small business.
Some advisers will be surprised to hear about advice firms sharing such sensitive information and so on. I went to the GAIA conference in September and I was amazed at how open and trusting you all were.
I think it works really well and, after the first meeting that Robert and I attended, we said to each other that we need something like this in the UK. It’s brilliant having GAIA, but Australia and New Zealand still have their study group and they meet up outside of GAIA. ZAG still exists in the United States, and we felt that we wanted something similar in the UK — a study group that really would do the same thing as GAIA but on a UK basis. And we set it up last year.
We have four firms that are members of that, and what happens in the study group stays in the study group. We share everything, but there’s 100% trust. You could argue that we are competing with each other, but we’re not, and there’s plenty of business for everyone.
So far the UK group has worked really well and, again, I think we’ve all benefited from sharing ideas and information. None of us is as smart as all of us; we’re not arrogant enough to think we’ve got the answers to all the questions.
You live in France. What is the situation there with evidence-based investing and financial advice?
I don’t know a lot about it, because I don’t get involved in the French industry. Certainly, as someone living in France, I can see that it’s dominated by the banks, and it’s all commission-based. In terms of index funds, they’re tiny. I know from Dimensional that, whilst they’re building a presence in Germany and the Netherlands and Belgium, France is a vast empty space where the penny hasn’t dropped yet.
Maybe the French are slightly different to other investors around the world. I think they’re generally very conservative in their outlook. Although it’s a commission-based, active management-led industry, it’s nice to see there are a couple of French guys who I’ve got to know on Twitter — Philippe Maupas and Julien Coudert — and they’ve recently launched a firm called Alpha & K, which I think is the first fee-only firm in France.
Tell us about your blog, The Financial Bodyguard.
I try to do one post a week to do with financial planning or investing, and then I do a Friday blog which is just links to things I’ve read or listened to or watched during the week that have interested or amused me. My plan for 2019 is to ramp up the amount of content I’m posting: I’d like to do three content posts a week, and then the Friday one.
One of my regular posts is a book review. I read a lot of books about all kinds of different subjects. Something I’ve learned from the financial writers on Twitter is that there’s so much that you can learn from all kinds of different subjects that you can apply in terms of investing and financial planning.
In addition to your own blog, you also help to support the work that TEBI does, because Bloomsbury is a strategic partner of TEBI in the UK. Why do you attach so much importance to financial education?
I think there are two threads to that. First and foremost, we provide content and education and information without any expectation of a return on that investment of our time. From a societal point of view, it’s really important that people know about this stuff. They’re not taught about budgeting, saving or investing at school, and most people just don’t have a clue.
For my parents’ generation, that wasn’t really a problem because you had a defined benefit pension scheme, and you worked at the same company all your life. Most people were pretty well-catered-for and benefited from the huge property boom.
But future generations haven’t got those advantages. There aren’t many defined benefit pension schemes left. The burden has been shifted very much from the state to the individual. The state pension scheme is unaffordable, and we keep seeing the retirement age being increased. You can’t rely on that as your retirement planning, so it behooves everybody to take responsibility for their financial planning and financial security. But if you don’t know what you don’t know, how do you do that?
There’s a huge thirst for information from people, and I think it benefits society as a whole if that information is available.
You referred to Financial Twitter, the so-called “FinTwit” community, earlier. We Europeans are vastly outnumbered on there by North American contributors. What observations have you made about the standard of debate on social media about these issues in the US, compared with the UK?
I have to say, before I launched The Financial Bodyguard, I went on record as saying that Twitter was a waste of time and that I couldn’t see the point of it. The reason for that was that, when I was looking at Twitter, I was following UK financial advisers and I didn’t know anyone else. I honestly couldn’t see that it benefited me in any way. It was people just stating things, whining or arguing.
But then I started reading Tadas Viskanta’s Abnormal Returns, where he curates the most amazing amount of content. Through that, I found some absolutely brilliant writers and, through them, I discovered Financial Twitter.
I think what’s great about the FinTwit community is that it’s people from all aspects of the investment industry — quant managers, hedge fund managers, active investors, passive investors. It’s a broad church, but everybody is so polite: there’s no sniping or back-biting or attacking people. I can’t tell you how much I’ve learned from some of the people.
That’s my experience too. Have you noticed how it’s the British advisers who tend to be the most aggressive?!
Absolutely! I think it’s so dangerous. What people don’t realise is that they’re being watched. Because of Finance Twitter, I attended the Evidence-Based Investing conference in California last June; and the overriding message from that was that you are being watched.
If you are thinking about the next generation — even people who are 35+ — they’re going to be looking at your social media profile. Potential clients are checking us out. Beyond our website, where are they going to find out about us? It’s social media. If we have a presence on Twitter, Facebook, or LinkedIn, they’re going to find us there and, if all they see is us sniping, and back-biting, and arguing, who’s going to want to do business with someone like that?
This has been a fascinating discussion, Carolyn. I have one final question to ask you: how do you see the investing profession, particularly in the UK, changing in the next 10 or 20 years?
First and foremost, I think MiFID II will have an impact. The message that costs matter is starting to hit home, and that can only grow, given that UK investors are now being given much more information about how much they’re paying for what they’re getting. If you can see in pounds and pence what you’re paying, you can determine whether you’re getting value.
I think that firms that only provide investment management and think they can carry on charging one per cent for that are being a bit foolish. The evidence shows that people who invest in index funds get top-ten-per-cent returns. When you can buy an index fund virtually for free and get top-decile returns, then why would you pay one per cent and maybe be top-ten-per cent? Do the maths! It’s not rocket science, and I think more people will come to realise that.
It needs more financial advice firms to realise that, because they can help push the message out. But I think that will happen, and I think MiFID II will be the biggest driver behind that. Those like you, Robin, who are making sure the story is constantly being told, will certainly help.
I think the second biggest change that will happen in the UK over the next ten years will be the rise of social media as the biggest source of new clients for firms. Already in the US that’s happening. It makes sense because they can read your blogs, they can see what you’re saying on Twitter, they can get a feel for who you are as a person.
I think brands will become almost irrelevant in our industry. People deal with people, and if they can see the type of person you are (and you can tell what type of person you are by how you interact on social media), they will be able to determine if you share their values, and if you think in the same way as them.
Certainly, future generations will be making decisions about who they choose to work with based on that. So, social media will be a driver of new business in the future.
The last thing is that robo-advice is not a threat to firms doing comprehensive financial planning. There have been numerous studies of millennials, and the evidence is there that they value face-to-face advice. They will use the internet to do research and find out where to find that advice, but I don’t think you’ll ever change the fact that people deal with people. An algorithm can’t help you when your husband has just died and you don’t know if you’ve got enough money to see you through the rest of your life. There are so many situations that an algorithm cannot cope with.
Even though I applaud firms like Vanguard that are offering low-cost advice alongside low-cost investing, it’s not face-to-face. Somebody on a phone cannot possibly know or understand your circumstances the way that working with a comprehensive financial planner can and people want trusting relationships from people. I don’t see that changing any time soon.
So, I think if you are doing proper financial planning, if you have an evidence-based investing philosophy, if you’re embracing social media, for all its faults, then the future looks rosy. But it’s a hard slog. It’s not going to happen overnight.
Here’s a link to Carolyn Gowen’s blog, The Financial Bodyguard. You can follow her on Twitter at @CarolynGowen, and you can find out more about her firm, Bloomsbury Wealth, and its philosophy by visiting its website and YouTube channel.
You can find more from Carolyn right here on TEBI: