There is a huge spread of opinion among financial professionals for topics of all stripes. Pick your poison:
- Actively managed portfolios or index funds?
- Insurance as an investment vehicle?
- Immediate annuities for retirement?
- How much to allocate internationally (if at all) for stocks and bonds?
- Do you factor tilt?
- Do you make tactical moves?
- Do stocks or bonds go in retirement accounts vs. taxable accounts?
- Invest or pay off the mortgage?
Not to mention the widespread range of compensation practices, conflicts, biases and priors every financial professional brings to the table. Even as professionals, try as (some of us) may we cannot escape our own pasts. We, like everyone else, are products of our past experiences and environments.
I used to wonder how seemingly intelligent people could recommend to their clients poor performing expensive mutual funds, illiquid and disastrous non-traded REITs and unbelievably complex permanent insurance products. I wondered if they were either idiots or villains and could see no other option. But I think I have a better thought now, at least a more realistic one. Despite my relentless skepticism (ok, cynicism), I’m a pretty optimistic person and have a tendency to give people the benefit of the doubt.
I think we are shaped, molded, formed by our professional coming-of-age. The best scenario for this process is spending time in many different professional environments. The worst case scenario is getting a finance job straight out of college and finding yourself in the same firm 25 years later, managing a younger version of yourself. How many different perspectives were you exposed to in that 25 years?
If you came straight out of college and went to work at a widget factory and your boss told you these were the greatest widgets in the world, you’d believe him, because you have a great deal of respect for him. He’d tell you how many people’s lives had been changed by your widgets. You’d see how he earned a great living selling the widgets to people and once a year his boss would come in and talk about the improvements for next year’s widgets, and everyone at the widget factory would cheer and go sell more new widgets. Soon enough you’ll be a widget vice president, teaching new college grads the glories of the company’s widgets. You’ll go to conferences with other people who make and sell widgets just like you and have manufacturing reps buy you expensive scotch and believe all along this is how people should buy and use widgets.
In a second scenario, after working for the widget company for a year or two you get a job offer from a company that sells gizmos. Now you know that there are widgets and gizmos. And a few years later you go work for a doohickey company and now you know about widgets and gizmos and doohickeys.
One day your mother calls and wants your advice about widgets and gizmos and doohickeys. Which path do you think better qualifies you to give her advice? If you’ve only every worked for the widget factory, you’re going to extol the virtues of the widget. You don’t care much about what gizmos and doohickeys may have to offer, because you’ve spent 25 years offering widgets as a solution and seen it “work” as a solution for your customers. You don’t work for the widget company because you are a bad person and you don’t sell widgets for a living because you’re an idiot, it’s just what you do.
It’s easy in finance to work for the widget company (or its parent company, subsidiaries or sister companies) for a very long time. It’s easy enough to stay in one place, know one way of doing business, offer one type of solution to customers. It could be an insurance company or a value investing shop or a regional broker dealer or a wirehouse. Being in one environment for most of a career will close your mind to the rest of the industry.
Personally I took a fairly meandering path towards this firm that involved a call center, a glorified broker’s assistant, a dually-registered advisor/broker to a fee-only independent advisor. I saw a good chunk of this industry over a decade but there is still a lot that I missed. I never worked at a wirehouse or in the back office of a broker-dealer. I’ve never made a cold call or gone door to door looking for business. I’ve never been a captive insurance agent or been taught to sell permanent life insurance to 30-somethings to pay for their kid’s college education. I’ve never been an analyst for a stock shop that believed their insights could trounce the market. I’m sure if I had done those things my perspective would be different, hopefully more broad and well versed. I try to make up for that by reading everything I can get my hands on.
Ultimately every purveyor of advice in this business can’t help but speak from their own experiences and lessons learned. Some of them are good lessons based in evidence. Some of them are weaker lessons based on rhetoric or mythology. It can be hard for investors to tell the difference, but they must try. Ask hard questions, present the giver of advice with conflicting opinions or research and see how they respond. Are they overly defensive? Does it sound like they’ve thought through both sides of the issue before, or are they scrambling to come up with an answer? And of course remember – everyone talks their book. Any business is built around a philosophy, and advice is going to stem from that philosophy, for better or worse.