Perspectives of a Financial Adviser (Part 1)

While my last post stands alone without any need for a sequel, I did mention correspondence with one particular financial adviser about Israelsen’s comments. I think her perspective is quite insightful and worthy of more blog time.

The adviser and I corresponded with regard to the Craig Israelsen article I wrote about here. I met this adviser at a recent Meetup and she seemed to be interested in trading approaches. I critiqued Israelsen because he presented performance information without any inferential statistics to demonstrate significance.

The financial adviser wrote:

     > The primary issue is that finance is not a hard science.
     > Yes, when someone gets a degree in finance, especially
     > quantitative finance, they have to do a lot of math and
     > receive a B.S. or M.S. However, methods of valuation,

I wonder how many financial/investment advisers actually have a degree in finance?

     > pricing, analysis, data processing and algorithmic
     > trading are all implemented imperfectly because people
     > are the instruments by which these experiments are
     > translated into real world. And yes, these research
     > methods use statistical significance and attempt to
     > demonstrate validity, but application is its own art.

I certainly would not dispute that statistical application can be subjective. I have seen some high-level debates among statisticians about particular application of methods, requisite levels of significance, and other important details.

I do not, however, interpret the subjectivity to mean statistical analyses should not be done. I lean more toward the other side in believing without such analysis, the data are incomplete.

     > Secondarily, Financial Planning is not a peer reviewed
     > scientific publication. As is the case in most fields,
     > the level of methodological rigor varies across
     > publications. Financial Planning is maybe analogous
     > to Scientific American in the health and science world?
     > SA is very different than the New England Journal of
     > Medicine. Financial Planning is meant to be a digest
     > of thought in the field, grouping data and opinion
     > together for consumers who don’t have the time and/or
     > skill to read the peer-reviewed journals but want to
     > stay current with the field’s thought leaders.

I thought this was a brilliant point. This also makes me wonder what level of rigor filters up to the retail customer in terms of financial product offerings, approaches to money management, and outright financial advice? Is it the content discussed in the peer-reviewed journals or the concepts discussed by advisers in non-peer-reviewed magazines like Financial Planning? If it’s the latter then is the average client safe in the hands of a financial adviser?

I will continue in the next post.