We ran an article the other day by a Canadian adviser and portfolio manager called JOHN DE GOEY, which has been causing quite a stir. controversy among financial advisers in Canada.
De Goey, who is based near Toronto, estimates that 95% of Canada’s advisers are giving bad advice that could cause significant damage to the clients they purport to serve.
While accepting that most advisers are well-meaning, he says the vast majority of them are simply unaware of, or are ignoring, the academic evidence on issues such as fund performance, diversification and the impact of costs on investment returns.
He has just written a book, STANDUP to The Financial Services Industry, which is aimed at the general public and encourages those who currently have an adviser to check that the advice they are receiving is sound.
In this interview, we ask De Goey about his views on advisers and what he hopes the book will achieve.
John, tell us about your professional background and how you can to form the views you have about financial advisers.
I was a bit of a consumer advocate when I was in my 20s, and I had a policy background. But there were no jobs in government then, so I ended up doing a bit of a sidestep. I realised I had a skillset that was very transferable to giving financial advice, so I became an adviser in 1993.
About eight or nine years ago, I wrote my previous book The Professional Financial Adviser. It really went nowhere, because Canadians were very smug and content with the way things were. They took the attitude that nothing was really broken. And I realised that the reason that fellow advisers weren’t changing the way they were doing things and becoming more professional, transparent and evidence-based was that they were quite convinced that they were doing things properly in the first place.
I realised this when I read a paper called The Misguided Beliefs of Financial Advisers, which came out in late 2016. As soon as I read it, I realised that that was the missing ingredient from my previous books, which were written mostly for advisers. So I decided to write a book for the general public this time, to make it clear that their advisers, while well-intended, are nonetheless giving them misguided advice based on beliefs that are simply not true but that advisers believe are true.
So what is your message for consumers, as far as financial advice is concerned?
JdG: No one is going to care more about your money than you. If you’re getting advice from a retail adviser, the chances are they’re giving you advice that is incorrect. They’re not trying to be sneaky, they’re not trying to cheat your or bamboozle you; they’re giving you advice that they believe is correct but that is nonetheless incorrect.
The evidence shows that they tend to run concentrated positions, they chase past performance, and they pay far too little attention to product costs. In fact, they should be more broadly diversified, they should not chase past performance, and they should care very much about product costs.
So these mistakes that advisers routinely and predictably make are the sorts of things that are hurting you as a person that is seeking their input. And the input that they’re giving you is often more harmful than if you hadn’t had any input whatsoever.
So, at least in Canada, you’re saying this isn’t a conflict of interest problem, but more of a behavioural problem. Is that right?
So, it’s a behavioural problem and an unwitting conflict problem. Advisers are conflicted but the problem is that they don’t realise it. It’s very difficult to overcome a behavioural challenge if people don’t even realise they’re doing anything incorrectly to begin with. If you say to someone, “you’re doing that wrong," it’s very difficult to get them to recognise that they’re doing the wrong thing when they are certain that they’re doing it right.
Let me give you an example. In 1964, in the United States, the Surgeon General released a report saying that cigarette smoking causes cancer. At the time, 42% of all Americans (and 50% of American physicians!) were smokers. We have a situation where the intermediary — the physician who is supposed to be looking after the welfare of their patients — is caught in a net, where they have to realise that what they were condoning (or maybe even encouraging) was, in fact, harmful and in direct conflict with the Hippocratic Oath. So, we have a situation where doctors — some of whom were addicted smokers — have to admit they were wrong. They have to go to their patients and tell them to do something different, while they themselves may not be in a position to change their own behaviour.
This is the same sort of thing here. We have advisers who are doing things that they’ve always done in a certain way, and the evidence, in some instances, has actually been around for almost as long. There was a paper that came out in the late 1960s, 50 years ago, that said that past performance doesn’t persist and shouldn’t be relied upon. Yet people continue to do it. It took us a generation or two to get physicians to recognise that they were part of the problem by condoning cigarette smoking. What we have right now is a similar problem, where advisers are part of the problem by chasing past performance and not paying attention to product costs.
Would you say that there’s been a deliberate attempt to cover up, or undermine, the facts, as happened with Big Tobacco in the 1960s?
This is absolutely what has been going on. Big Oil is doing the same thing with regards to climate change. Whenever there are big corporate interests that are threatened with truth, they will find a way to change the subject or give you a “Yeah, but…” They’re really just trying to do everything they can to continue to make money the old way, because doing things in a way that reflects the evidence will be bad for profit margins.
What percentage of advisers do you think are actually giving bad advice in Canada?
If I were to hazard a guess, my number would be 95%. Only one in 20 is doing it properly. In Canada, you’re either licensed to sell mutual funds, or licensed to sell securities, stocks and bonds, or ETFs. There are about 10,000 people in Canada who are registered to sell securities and about 90,000 registered to sell mutual funds. My estimation is that, on the securities side, it’s about 50/50 — half of them understand it, and half of them don’t.
However, on the mutual funds side, my experience is that I have yet to meet a single mutual fund registrant who actually understands that the products that they’re recommending are expensive and that they could do a better job recommending index funds, passive funds, factor-based funds from Dimensional, ETFs, that sort of thing… and they frequently chase past performance. So, my experience is that, of the mutual fund registration side in Canada, there is quite literally no-one that I have found that understands that they themselves are part of the problem.
I cannot stress enough; these are not people who are trying to do harm, these are people who care about their clients and have good intentions. They’re all doing it in the same way and, as a result, groupthink sets in and, when they talk amongst themselves about what they’re doing for their clients, it’s just presumed that that’s the way things are done and so there’s no opportunity for people to step back and think about what they’re doing.
As well as groupthink, what other factors do you think are at play here? Why are so many advisers giving bad advice?
This might be another factor, or another extension on the groupthink idea, but to those who are familiar with George Orwell: if you’ve read 1984, there’s a certain amount of the industry writ large — the regulators, the product manufacturers, the firms that hire registrants and advisers — who are collectively Big Brother. They try to get people to think a certain way, and STANDUP advisers are sort of like Winston Smith. They’re people who are always looking over their shoulder, aware of being watched and wondering whether or not they can trust the person they’re talking to, because everyone — as in 1984 — is presumed to be thinking in a certain way, and encouraged to spout the party line with regards to how things work. And how things work is profitable to the industry, but not necessarily what’s best for the investor. As soon as the STANDUP adviser wants to step out of line and point out that the emperor has no clothes, and that the current way isn’t working very well, that person is very quickly marginalised and made out to be less than reputable… simply because they’re different.
When the entire industry is buying into a world view — that past performance is reliable, and cost doesn’t matter, and that you can pick funds that will outperform; whenever someone points out that the evidence doesn’t support that, that person becomes a pariah, simply for speaking the truth.
You use that phrase “STANDUP adviser”. What do you mean by that?
JdG: In my previous book, I coined a phrase — a long acronym: “Scientific Testing And Necessary Disintermediation Underpin Professionalism”. It basically means that professionals disclose facts and, if you’re a professional adviser, you’re going to make recommendations based on evidence. So, there are relatively few advisers who are prepared to stand up and do what’s right for the clients by making recommendations based on evidence. Ironically, the four editions of The Professional Financial Adviser — my previous book — was trying to get advisers to be STANDUP advisers (“the good guys”, essentially), but these advisers didn’t care because they didn’t recognise themselves as “the bad guys”.
So the new book is using the same acronym, but it’s been repurposed. STANDUP now means: ‘fight the power’, stand up for your yourself and your own interests; and it’s been written for consumers. Using the same principles — evidence, disclosure, professionalism — but the longer-term impact is now being repurposed as something that investors should be looking for. They should be standing up for themselves and looking for an adviser who understands what is really best for them.
What, then, would your message be to financial advisers?
The phrase that I use with regards to advisers is that the sincerest apology is to change behaviour. So for example, if someone is watching TV loudly while you’re trying to sleep next door: you ask them to turn it down, they say they’re sorry, but then they turn it back up five minutes later… it is fair to conclude that they weren’t really sorry. If they’d been sorry they would have kept it that way. And similarly, if an adviser says they didn’t realise they were giving bad advice: I’ll believe that they’re misguided if they actually change the advice that they give. If they make recommendations based on the evidence, I’ll believe they’re sorry.
If they just say they’re sorry but carry on doing what they’ve always done, I’m going to encourage their clients to find an adviser who actually works based on the real evidence.
Say this interview has pricked an adviser’s conscience. They’re wondering whether they need to change. What would you say to them?
The evidence, with great respect, shows that they were wrong. No matter how good an adviser’s intentions were, the evidence has shown for a very long time that these methods don’t work. My experience has shown that a lot of advisers don’t like to rock the boat; they’d rather follow with what everyone else is doing. But for an adviser who realises that they’ve been doing the wrong thing, there’s not much alternative other than to change. The evidence is becoming incontrovertible.
It’s like with climate change, 20 years ago there were certain people who would deny it and there was a possibility that they might have been right. I don’t think there’s any credible person, these days, who would express uncertainty about climate change. It’s absolutely incontrovertible at this point. It’s like that with regard to the findings of the ‘Misguided Beliefs’ paper: there’s no question that advisers are giving advice that is ultimately harmful. The question that it begs is: are you going to continue to whistle past the graveyard and act as if nothing has changed, or are you going to change the advice that you give?
We recently asked Rick Ferri the same question: Why do so many advisers still use expensive, complex, active strategies? His view was that it’s down to two reasons: they’re afraid to admit to their clients that they were wrong and, more importantly, they worry that the clients would turn to them and ask “What am I paying you for, if you’re going to adopt a passive strategy?”
Those are both legitimate concerns for advisers who don’t do much else, and this is consistent with what I was saying regarding the physicians and the cigarettes 55 years ago. It’s the same sort of thing. Nobody wants to admit that they’re wrong, and lots of people are using active management not because it works, but because it allows advisers to justify their existence. The presumption is that, if you use index-based funds or factor funds or exchange traded funds, you don’t really need an adviser. But the same evidence that shows that these old ways don’t work also shows that there’s a great deal of benefit that comes from behavioural coaching. Advisers can add value, just not in the way that they’ve been telling clients that they add value. The real value they add is in helping people to steer the course: to trade less, to rebalance in a purposeful manner, to be mindful of tax consequences, to plan for other life events, to have an emergency fund, to have the right amount of insurance, to have wills in place, and what have you.
There are a whole bunch of things that advisers can do to add value; it’s just picking stocks, picking funds, and timing markets are not among them.
There have been numerous books written on this subject, and academic research going back to the ‘60s that has still been relatively unacknowledged. What makes you think that your book will make a difference?
I don’t know that it will, but the approach I’m taking is different. Up until now, people have either tried to speak to advisers, or to regulators, or possibly get consumers to understand the problem. But the only people who have read books like this are people who are already relatively savvy, and who tend to be do-it-yourselfers.
So many of these books and papers have been speaking to the wrong audience: savvy do-it-yourselfers, or self-interested advisers that don’t want to acknowledge that they’re a part of the problem. What’s different with this book — which, as far as I know, is the first of its kind — is that it goes to people who know they need advice, and know they can’t do it themselves, to empower them to ask the tough questions and to specifically give them 50 or more questions — from the general to the specific — to help them determine whether they can really trust their adviser.
Advisers may not be trying to pull the wool over their clients’ eyes, they may have had the wool pulled over their own eyes. Advisers are oblivious to their own lack of awareness of the evidence, and there are two outcomes that I want this book to have: we need a whole army of investors to go their advisers to confront them about these things, and the misguided advice needs to be rooted out of the system.
ROBIN POWELL is a freelance journalist and editor of The Evidence-Based Investor. You can follow him on Twitter at @RobinJPowell.