Perspectives of a Financial Adviser (Part 5)

Today I conclude discussion of an e-mail correspondence I recently had with a financial adviser. What she said about a lack of peer-review in the industry has been quite the eye-opener for me.

     > And then, take it one step further and pretend that
     > you are not the investor, and instead are an advisor
     > for a relatively unsophisticated (in the field of
     > finance) client (or 200-300+ people as is usually
     > the case). Which would you rather be responsible for
     > advising a client to do… or, would you choose some
     > other option that you have available? Keep in mind
     > that advisors bear responsibility, not just legally,
     > but personally (emotionally) for knowing that they
     > may lose their clients’ retirement, education, or trust

Having so many clients is no excuse for using sub-optimal investment methods—methods that any individual could execute for him/herself given a healthy dose of education.

With regard to options, I have heard advisers complain about the excessive time/cost it would take to get regulatory clearance. Perhaps regulators are somewhat behind the curve but I’m not convinced. Some investment advisers do employ option strategies for their clients. Given my belief that many advisers don’t know options I wonder if those complaining have even tried? And if the compliance firm is to blame then find one that is option-friendly!

     > money. And, remember that they have to implement their
     > investment strategy for not just one or two families, but
     > hundreds. Given these conditions, do you think advisors
     > will be overly risk-averse (compared to the purely
     > logical choice they might otherwise make based on
     > economics) in their decision making? Statistical inference
     > matters less to investors/clients who have lost any
     > percentage of wealth, especially if they don’t fully
     > understand why the risks were taken/decisions made.

To me, the omission of statistical significance is like off-label drug usage. Physicians occasionally prescribe medication for reasons not mentioned in the package labeling. If this is not standard of practice and if peer-reviewed data do not support said off-label indication then the physician could be susceptible to legal action should adverse events occur.

Given that evidence-based medicine has done well to advance medical practice in this country, why aren’t financial advisers held to the same standard? Do good statistical research that can be authenticated and replicated and use those methods to manage money for the public. Without this, I struggle to view the financial industry as delivering anything more than quackery to unsuspecting retail clients.