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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. Given that it’s a relatively new concept — even though the best advisors have always practiced it — it might be helpful to look carefully at some possible alternatives to being an evidence-based advisor.
Here is a baker’s dozen worth of options for your thoughtful consideration. Many were adapted liberally from a piece on evidence-based medicine written by Dr. David Isaacs and Dr. Dominic Fitzgerald for the “British Medical Journal” in 1999. If I’ve missed any category, please let 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. The idea is that if clients and prospects are sufficiently scared, they will run to the fear-monger for refuge. In other words, 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 monetary evidence (cha-ching).
The vehemence-based advisor
This sort of advisor sets out to substitute volume and passion of transmission for actual evidence so as to pummel, cajole and harass 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 deemed powerful substitutes for mere 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 (again, rarely she, as is true in most other advisor categories) is so smart, don’t cha know?
The providence-based advisor
An advisor who lacks convincing evidence will often claim that the advice he is giving comes straight from God. Sometimes the claim is implicit, sometimes explicit.
Sometimes the motivator is guilt, sometimes it alleged brotherhood. But the results are usually hellish.
The intuitive advisor
Alleged common sense is often more attractive than real evidence, especially because good investing is often counter-intuitive. Therefore, this sort of advisor will go with his gut about stocks, funds, managers, styles, timing and forecasts.
He will rarely just stand there. He’ll usually be doing something.
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.
He will do nothing, because he has no good evidence-based idea what to do. This, of course, is most often better than doing a non-evidenced series of somethings. But that’s a really low bar.
The self-righteous advisor
This advisor hoses his clients while remaining utterly convinced that they are doing what’s best for them. He’s often wrong but never in doubt.
No one should be surprised that, in this instance (as well as others), “what’s best” is often really, really good for the advisor. It doesn’t usually work out so well for the clients.
The nervous advisor
Fear of clients being upset and the potential consequences thereof are powerful stimuli for excessive and repeated portfolio changes. Counterintuitively, this sort of advisor is often quite afraid of offering reasonable expectations, because unreasonable expectations are so much more attractive. Plus, they can be counted on to tell clients and prospects what they want to hear rather than what they need to know.
The ideology-based advisor
This sort of advisor is unalterably committed to his market ideology, contrary facts and evidence notwithstanding. They know what’s True (with a capital T) and will stick with that come hell or high water (and beyond).
The publicity based advisor
This category sets out to convince clients of his bona fides via media appearances, publicity shots and name recognition rather than real client service. That’s because he had to become so well known for a reason, right?
As British journalist Robin Powell puts it, “All too often we base our investment decisions on industry marketing and advertising or on what we read and hear in the media” or on something else altogether.
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 (often academic) research, as well as the demonstrated ability of the proffered solutions to work in the real world over the long haul (which is why I would prefer to describe this approach as science-based investing). It means changing one’s mind, approach and strategy when the evidence demands it.
The obvious response to the question about whether one’s financial advice ought to be evidence-based is, “Duh!” Then again, advisors and investors of every sort — those with a good process, a bad process, a questionable process, an iffy process, an ad hoc process, a debatable process, a speculative process, a delusional process, or no process at all — all think that they are evidence-based practitioners already.
They may not describe it that way specifically. But they all tend to think that their process is a good one based upon good reasons. Nothing to see here. Move right along.
But the bald fact remains that all too few in the financial world practice evidence-based investing. Take a good look at the alternatives and carefully consider how evidence-based your advice and your practice really are. Test and re-test your purported evidence for errors, holes and unsupported conclusions.
Investing successfully is really hard. Adding a client component makes it harder still. Even the best advisors are going to be wrong far more often than they would like.
If you want to do right by your clients, keep checking and re-checking your work, your assumptions and your conclusions. The evidence demands no less.