Comments on The Psy-Fi Blog: Disclosure Won't Stop A Conflicted Advisor

Hi Rob S'Ok to disagree: only way we ever adv...

2009-09-18T21:14:23.051+01:00

Hi Rob

S'Ok to disagree: only way we ever advance our thinking :)

Obviously I can’t comment on the investors that you’ve talked to personally although I certainly don’t doubt their interest. However, there’s the ever-present danger of extrapolating from a self-selecting set of people – those who seek advice and are genuinely interested ought to be the least of the problems. Unfortunately the evidence also suggests that even interested people find it hard to overcome their biases if they’re actively involved in making investment decisions.

I’d agree that most people are comfortable taking price into account but I would dispute that they’re very good doing the same with value. There’s plenty of evidence that people use price as a short-cut for “quality” – it’s quite common for stores to increase the price of goods to shift them when they’re not selling. As ever price is what you pay, value’s what you get.

Personally I don’t think purely passive investing in a single asset class is a particularly good idea but I also don’t think any approach requiring active investment decisions to be made by all individual investors is sensible either. Some kind of quasi-mechanical-passive approach across multiple asset classes with automated rebalancing would seem to be indicated: although that sounds like a peculiar echo of the efficient frontier to be honest ...

I hope the FSA takes this research into account wh...

2009-09-18T14:50:41.860+01:00

I hope the FSA takes this research into account when it finalises the RDR. It's recomendation of having a "Sales Adviser" seems to be the worst of all worlds.

Moreover, advice need not be binary, as in good or bad. There are shades of grey, just as there in hotels ranging from Fawlty Towers to the Dorchester. But how you assess 2 or 3 star advice, and how much you should pay for that, is a tricky issue.

It's all very well for us to sit around and...

2009-09-18T13:41:14.456+01:00
It's all very well for us to sit around and discuss PE/10 and q and so on but the vast majority of people have no idea what we're on about and not much ability to change that state.

We disagree strongly on this one, Timarr.

I have spoken with thousands of middle-class investors and a good number of big-name "experts" re the valuations question. Everywhere it comes up the reaction I get is the same. The idea of taking valuations into consideration makes perfect sense to most middle-class investors. Middle-class people take prices into account when buying everything they buy (except stocks). So the idea of investing rationally is a natural for them.

There's one big problem. Most middle-class investors believe that the "experts" in the field must have some idea what they are talking about and the "experts" have been telling us non-top for 30 years now that there is no need for investors to adjust their stock allocations when prices go to insanely dangerous levels. Millions of investors were bullied into investing recklessly with their retirement money and we have experienced the greatest loss of middle-class wealth in the history of the United States as a result.

I think it is fair to say that it is not pure coincidence that The Stock-Selling Industry obtains a huge financial payoff for promoting Passive Investing. The downside is that this "strategy" always ultimately causes an economic crisis when the investors following it are wiped out. This must stop.

"Know Nothing" investing advice doesn't cut it. The promoters of Passive Investing say that it is based on academic research. The reality is that the academic research has been showing for 28 years now that valuations affect long-term returns (and that the chances that Passive Investing could ever work in the real world are thus precisely zero). When we tell people that we are reporting what the historical data says, we take on an obligation to report what the historical data says accurately.

Rob

I think the question of intellect is an important ...

2009-09-18T07:42:35.464+01:00
I think the question of intellect is an important point. On one hand over-analysis and the use of too much information has been shown to yield worse results in a number of fields. More information actually makes it harder to see the wood for the trees, it seems.

On the other hand I think we need to be careful about our own intellects. It's all very well for us to sit around and discuss PE/10 and q and so on but the vast majority of people have no idea what we're on about and not much ability to change that state.

Arguing that the average Joe or Joelyne should learn about this in order to protect themselves may simply expose them to the vast range of psy biases that get discussed here for no extra benefit. There is a place for a know-nothing, good enough approach and otherwise aligning advisors and investors interests should be a priority.

On physicians I don't know any details around sponsored talks but other research seems to show that they are also conflicted by pharma gifts and so on, so it wouldn't be surprising if this is a problem.

I'd love to see if these results generalize to...

2009-09-18T05:46:04.173+01:00
I'd love to see if these results generalize to physicians giving pharmaceutical industry sponsored talks on treatments for condition X.

Forced disclosure is common in talks. Does this turn doctors into biased promoters in the same way as demonstrated with financial advisers?

I love the post. It makes a very important point t...

2009-09-17T14:34:01.285+01:00
I love the post. It makes a very important point that is rarely made.

I don't like Bernstein's example about the high-school drop-out. What matters is whether the advice is good or not, not how many years the person giving the advice went to school. Bernstein offers some great advice. Berntein also offers some horrible advice. The trick is separating the good stuff from the bad stuff.

Bernstein is highly intelligent. That may contribute to the good part of what makes some of his advice so good. It also contributes to the bad part of what makes some of his advice so bad. The single biggest problem with investing advice is that so much of it is the product of rationalization. What makes someone a great rationalizer? Intellect. Intellect is often a negative in this field.

I'm not saying to look for dumb people to give you your investing advice. My take is that you need to drill down and make sure that the advice being offered makes sense. The behavioral problem is that most investors decide in advance what they want to hear and then go searching for an "expert" to tell them what they want to hear. "Experts" with impressive educations are more persuasive in telling us stuff that we want to hear that will probably cause us to lose lots of money.

Rob

I don't think that's a rant: seems perfect...

2009-09-17T13:09:17.835+01:00
I don't think that's a rant: seems perfectly reasonable comment. Regulation clearly isn't the whole answer but enforeable minimum standards, the threat of being struck off and losing your livelihood and an industry funded compensation scheme would be a start.

Blind trust in regulation is always stupid but the reality is that this is what most people do with advisors of all kinds. All regulation can do is reduce the problem. The alternative is all problems being solved by the free market and the evidence, at the personal level, is that it can't. So I think we need a balance and that the balance is currently wrong because the alternative - disclosure - makes the problem worse, not better.

Glad you like the blog: all opinions (if politely put) are welcome.

There is a very easy way of knowing if your stockb...

2009-09-17T12:37:00.874+01:00
There is a very easy way of knowing if your stockbroker is a high-school drop out, it is called asking a question. I was with you up until that point. How do I know that the medical certificate hanging on the Dr's office isn't a 3-day pharma paid beach resort golf paying long weekend with a couple of seminars in the morning?

Your implicit assumption is to avoid trusting a conflicted advisor but blind trust of regulation (wasnt Bernie Madoff highly regulated?) is the answer? I believe everyone should do what is best for them. And expect that everyone else is doing the same. And take even paid advice with a grain of salt and use your common sense. And if an advisors incentives is not aligned with yours, they are probably a salesman more so than an advisor anyway.

Sorry for the rant, I like the blog a lot and recommended to many people in finance.