I recently read Hans Rosling’s excellent book, Factfulness, and came away impressed with his thinking because it provides the comfort and hope that comes with evidence. Rosling’s thesis is that the world has become a whole lot better over the past couple of generations, but most Westerners are stuck in an over-simplified paradigm of “us” and “them” regarding international development.
Financial advisors could learn from Rosling’s book. Rosling refers to himself as a “possibilist” and, as such, rejects being labelled as an optimist. He focuses on what is possible based on the evidence that, although things might still be pretty bad, they have unambiguously gotten better.
One theory about why the outdated paradigm persists is that many intelligent people assume that they’ve figured things out already and that global quality-of-life metrics are relatively static.
I cannot help but think there’s something similar afoot with our advisors. Most advisors I know are like me; they entered the business in the 1990s by getting a license to sell mutual funds. Some have gone on to get other designations and licenses, but most have not.
My specific concern is that many of Canada’s advisors today are like the typical people in Rosling’s audiences: intelligent and well-intended, but oblivious to the fact that their worldview is horribly out of date. Those investment advisors who choose to manage client portfolios using high-cost mutual funds reliant upon strong past performance are managing money as they did when they entered the business, not based on the way things are today. As the Questrade ad asks: “Are you still investing like it’s 1999?”
Advice in 1999
Pick funds based on past performance.
Product cost doesn’t matter.
Concentrate on winners.
Recommend embedded compensation products.
There are no low-cost alternatives.
Reality in 2019
Past performance is essentially useless.
Product cost is a critical part of performance.
Diversify within and through asset classes.
Give clients a fee-based choice.
There are many low-cost alternatives.
My experience is that well-intended advisors haven’t kept up. To many of them, the world has not changed and, consequently, they go about their business in pretty much the same way as they did when they were just starting out. Times have changed. Advisors need to embrace factfulness and become possibilists. The financial services industry is both “bad” and “better.” While celebrating the modest improvement in moving to low-cost products, the industry also needs to recognize that more needs to be done.
John De Goey is a portfolio manager with Wellington-Altus Private Wealth Inc. in Toronto