It’s time for the penultimate part of our serialisation of JOHN DE GOEY’s book, STANDUP to the Financial Services Industry. The book aims to protect investors from bad financial advice. It’s written primarily for a Canadian audience, but it contains useful information for investors everywhere.
The challenge for ordinary investors when dealing with financial advisers is one of discernment. Advisers just seem to be so confident and competent, and confidence begets the impression of confidence. So how can a non-finance personal possibly hope to determine whether their adviser is full of it or not?
I’d like to stress again that advisers are not deliberately trying to bamboozle investors. Instead, they’ve been bamboozled themselves — so much so that they actually believe the tripe they often peddle. It seems advisers focus on past performance and not on cost because they have been persuaded by industry interests that past performance matters and cost doesn’t. That’s demonstrably backwards. In reality, past performance is of no appreciable value in determining how things might turn out in the future, yet cost is a reliable determinant of the future. The less you pay, the higher your future net returns are likely to be. Advisers are trying to help, but are, in fact, often doing more harm than good.
Advisers seem oblivious to evidence. They defend their actions by saying they are “entitled to their opinions”, but those “opinions” are actually just mis-stated facts. What would you think if some said it was their “opinion” that 2 + 2 = 5? Everyone is entitled to their own opinion, but no one is entitled to their own “facts”.
Astonishingly, more advisers still fail to recognise that past performance is a ruse and that cost matters a great deal. They focus on the wrong things when making product recommendations and the net result is that investors are often left with portfolios that are too expensive, too concentrated and too reliant on what happened in the recent past. In contrast, good advisers provide focus and discipline to keep the clients invested in low-cost, low-turnover diversified portfolios that are customised to their clients’ circumstances.
The problem when dealing with advisers who believe falsehoods is that their conviction, combined with the fact that they know more about products and services, means that it’s difficult to hold them accountable. The problem is a perverse one — good intentions leading to bad advice.
In essence, the problem is that advisers have been co-opted by corporate interests to do what is profitable for those interests at the direct expense of the interests of the clients that the advisers are supposed to be serving.
You can buy John De Goey’s book here, and you can find out more about his philosophy and his work by visiting his website.
You can find the other parts of this series here:
How to protect yourself from bad advice
Has your adviser succumbed to groupthink?
The biases and blindspots financial advisers have
Three questions you should ask an adviser
Picture: Steve Johnson via Unsplash
