There is a new and growing movement in our industry toward so-called evidence-based investing (which has much in common with evidence-based medicine). As Robin Powell puts the problem, “[a]ll too often we base our investment decisions on industry marketing and advertising or on what we read and hear in the media.” Evidence-based investing is the idea that no investment advice should be given unless and until it is adequately supported by good evidence. Thus evidence-based financial advice involves life-long, self-directed learning and faithfully caring for client needs. It requires good information and solutions that are well supported by good research as well as the demonstrated ability of the proffered solutions actually to work in the real world over the long haul (which is why I would prefer to describe this approach as science-based investing, but I digress).
The obvious response to the question about whether one’s financial advice ought to be evidence-based is, “Duh!” But since all too few in the financial world practice evidence-based investing, we ought carefully to look at the possible alternatives to being an evidence-based advisor. Here is a baker’s dozen of them for your thoughtful consideration. If I’ve missed any I’d appreciate your letting me know.
- The eminence-based advisor. This (usually older) advisor wants you to believe that the more senior the practitioner, the less importance needs to be placed on anything so trivial as mere evidence. Apparent experience, it seems, is worth more than any amount of evidence. These advisors have a touching faith in personal experience, which can be defined as “making the same mistakes with increasing confidence over an impressive number of years.” Such an advisor’s white hair and balding pate are often called the “halo” effect and act to trump substantive knowledge. His (rarely her) well-appointed suite of offices featuring fine views and paneled wood are usually seen as the best available evidence of quality.
- The fear-based advisor. This sort of advisor keeps on shouting from the rooftops that “the end is nigh,” over and over and over again, no matter what actually happens, in order to get you to respond.
That’s because, quite simply, fear sells.
- The crooked advisor. This category of advisor is both self-explanatory and far bigger than generally assumed. For these advisors, prospects and clients are merely opportunities to be exploited by the best available means. They actually do care about evidence, but it’s a very different sort of evidence (cha-ching).
- The vehemence-based advisor. This sort of advisor sets out to substitute volume of transmission for actual evidence so as to pummel prospects, clients and adversaries into believing that he (rarely she) is really good.
- The eloquence-based advisor. Proponents of this approach are always smoooooth. They feature year-round tans (even in New York), power ties, fine suits from Barneys, and (especially) a silken tongue. Sartorial elegance and verbal eloquence are powerful substitutes for evidence.
- The novelty-based advisor. This specimen emphasizes what’s new and unique, the less transparent the better. They always have the latest and the greatest. Black boxes and hedge funds are prominent in this space…because he (rarely she) is so smart, donchaknow.
- The providence-based advisor. An advisor without convincing evidence will often claim that the advice they are giving comes straight from God. Sometimes the claim is implicit, sometimes explicit.
- The intuitive advisor. Alleged common sense is often more attractive than real evidence. Therefore, this sort of advisor will go with his (rarely her) gut about stocks, funds, managers, styles, timing and forecasts.
- The diffidence-based advisor. Some advisors see a problem and look for an answer. Others merely see a problem. The diffident advisor will often do little or even nothing out of a sense of paralysis or despair. This, of course, is most often better than doing a non-evidenced series of somethings.
- The self-righteous advisor. This advisor hoses his (rarely her) clients while remaining utterly convinced that they are doing what’s best for them. No one should be surprised that, in this instance, “what’s best” is often really, really good for the advisor.
- The nervous advisor. Fear of clients being upset and the potential consequences thereof are powerful stimuli for excessive and repeated portfolio changes. Counter-intuitively, his sort of advisor is often also especially afraid of offering reasonable expectations because unreasonable expectations are so much more attractive.
- The ideology-based advisor. This sort of advisor is unalterably committed to his (rarely her) market ideology, contrary facts and evidence notwithstanding.
- The confidence-based advisor. This category is restricted to those in the “Pinnacle Club” or its equivalents. His (rarely her) kissin’-cousin is the publicity-based advisor.
Important note: Many of these categories were, in the best tradition, adapted liberally from here.