The evidence-based financial planner
A GUEST POST BY SAM INSTONE
The evidence-based planning movement is on the rise.
And to my surprise, it’s become the most significant event of my career.
After all, the financial services industry has traditionally been more about sales than a scientific profession.
So, what is this movement?
And why do I so passionately believe in its ability to enrich people’s lives?
In psychology, the Four Stages of Learning begin with unconscious incompetence…
In other words…
When you’re doing something wrong and you don’t know you’re doing it wrong.
Most of the tasks we do as humans, we do badly, and don’t even think about it…
Have you ever stopped to think about the fact that you’re probably brushing your teeth wrong?
Our default state is #1: unconscious incompetence.
This certainly applied to me when I entered financial services.
And it seems to apply to the vast majority of industry insiders still.
Fortunately for them, it sadly relates to most of their clients as well…
It’s the blind leading the blind.
Over my career my frustration with the traditional system has grown.
Luckily, teachers, journalists and a few rare ‘real’ advisers acted as guides through the remaining 3 stages of learning.
Conscious incompetence, conscious competence and finally propelling me towards unconscious competence…
To the discovery of a movement/community all about helping investors benefit from an evidence-based approach….
A pivot from a financial services industry all about rewarding those who sell products, to a future about rewarding those who purchase them.
It’s powerful and profound.
Affecting advisers and investors.
Who recognise the conversations need to change.
The first phase of this transition is well-documented.
PHASE 1
A new breed of next-generation advisers refused to simply be a distribution arm for financial product providers.
Rather than being incentivised by big brokerage firms to push as much red/blue/green product as possible…
These advisers affirmed their commitment to do what was right for their clients.
To be the best, not the biggest.
Independent, not tied.
Transparent, not opaque.
Maybe the best products and funds were from those firms that had traditionally paid advisers so richly for selling their wares…
And lavished them with overseas incentives and alcoholic drinks....
But it's far more likely they weren't
Improvements in technology, regulation and best practice have enabled scientific evidence to prove this.
These ‘new breed advisers’ severed their outdated commission-based strategies and set out to work solely in the best interests of their clients (transitioning to fee-based models).
Personal finance journalists turned to these far less-conflicted advisers for quotes and insights.
Ironically, a small/quality practice that gave genuinely honest guidance was far more likely to be quoted in the national press than a million-dollar-earning, sportscar-driving broker from a big firm.
The public also slowly harkened to financial journalists’ calls to avoid inflexible, opaque and expensive insurance-based products sold by traditional commission-only salespeople.
Clients of banks and private banks began to realise the same pertained to them.
Billions of dollars began moving from underperforming active funds towards index funds.
Not only have we witnessed people turning to evidence-based planners for access to the best funds available…
But peer-reviewed, academic evidence now proves it’s far better to have a fee-based fiduciary than a conflicted salesperson in your corner.
Glowing press coverage of index funds created further demand for evidence-based planners.
In what became a virtuous circle…
Press attention, demonstrably better returns, and the burgeoning independent planning movement combined to offer a viable alternative and altered the financial services landscape.
But evidence-based planners were on a mission bigger than just removing obvious conflicts.
These pioneers were fuelled with a passion for meeting clients’ needs.
PHASE 2
A second, transformative development quickly followed on the heels of the revolutionary decision to divorce financial planning and advice from the product provider.
Agendas at planning conferences changed.
The investment track (formerly the core of most planning conferences) began to shrink.
In its place…
Sessions on softer skills such as setting life goals and helping clients manage traumas (like death, divorce or illness)…
And, practice management covering topics such as meritocratic career tracks, sector specialisation, remuneration structures that mirrored other professions (like law, medicine and accountancy) grew.
While much of the traditional financial services community derided the significance of these developments as ‘hypocritical rhetoric’, they did not go completely unnoticed.
While no business-school class project could have foreseen the success of this pivot…
Evidence-based planners (simply by virtue of pursuing better ways to meet their clients’ needs) were also finding ways to strengthen their practices by further bonding with their clients.
I recall salespeople’s complaints about clients being able to get everything from the Internet...
“Why would the client need an adviser, if they can buy direct on a trading platform?”, they’d ask.
Today, it’s inconceivable to think of an evidence-based planner expressing such a concern.
Why?
Because evidence-based planners have successfully transitioned their practices from product sales and investment-transaction-based activities to holistic life planning…
And in the process deepened their ties to their clients.
They now have little fear of losing their clients to competing services.
The value is easy to both demonstrate and calculate.
Financial planning is complex, there are many moving parts and emotions.
Like dieting and regular exercise, good investment is simple, but not easy.
Life isn’t a rehearsal and the real value of a good planner is in showing clients how to make their life count…
Helping them make more informed and effective financial decisions…
To feel relieved, confident, self-assured and empowered about their futures.
The evidence-based planning community is still evolving in interesting ways.
Once planners reoriented toward the client and away from the provider, a string of powerful changes was set in motion.
While the range of activities under the planning umbrella is complex and diverse, the winning firms have a shared mantra:
The client’s success is paramount.
They grasp the key fact that has long eluded traditional financial services:
If the investor doesn’t win, everyone else in the process has failed.
By embracing scientifically proven methodologies, soft skills and moving beyond simple transactions; evidence-based planners put themselves on the winning side.
It’s an exciting movement which I am lucky and privileged to be a small part of.
Sam Instone is CEO of AES International