Until anesthesia came along in the nineteenth century, most physicians were deemed to be about as useful as undertakers for most serious ailments. It was a time of trial and error, individual doctors making up treatments one day and seeing if they worked the next. Of course, if something worked, they couldn’t be sure if it was due to luck or chance, not until they had tried the technique out on at least a few more hapless patients.
Unfortunately, the world of financial advice appears to have just barely caught up with nineteenth-century medicine right now. Different business models, with varied financial incentives for the advisers, necessarily mean that investment recommendations often vary as much as the Himalayas do from Hawaii.
Similarly, when talking to potential clients, I’ve learned not to ask whether they completed a “financial plan” with a previous advisor. A “plan” these days can mean anything from a simplistic, linear retirement projection with an assumed 8% portfolio gain every year to a 30-page document full of graphs and statistics, but no real insights. In other words, it’s a term of art so vague that neither of us can possibly know what the other means in casual conversation.
The good news is that, as a result of last year’s market crash, savvy consumers of financial advice have started to catch on and understand, whether they can articulate or not, the old bromide about there being three kinds of investment professionals:
1. Those who understand they have no clue where the markets are going in the next six months and who acknowledge this lack of foresight in order to build investment strategies that do not depend on it.
2. Those professionals who haven’t a clue about what they don’t know and who thus build investment strategies upon flimsy illusions.
3. Those who, in private moments, know that they don’t know the markets’ next moves, but whose professional existence depends upon pretending that they do.
Once the next bull market is sufficiently underway, however, the bromide will likely be forgotten, until the next generational market crash. So it’s not clear, as we sit here today, whether the financial-advice industry will ever be incentivized to develop true professional standards of care.
Then again, the old professional stalwarts, medicine and law, haven’t exactly upheld the highest standards of conduct over the past couple of decades. So perhaps it’s a good time to recall George Bernard Shaw’s observation long ago that every profession is a conspiracy against the laity, and just leave it at that. At least consumers will know to keep up their guard.
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