I realize I didn’t fill in the details of “what’s next?” as many people have asked for more details both through the comments section and through personal emails about yesterday’s announcement that I am no longer a financial advisor. I will respond en masse:
I Believe There is A Tipping Point Coming…
Two tipping points actually. The tipping points I am referring to is the growing number of advocates (both individual investors and advisors) towards a change in the financial services when it comes to the passive versus active debate, as well as to the mechanism by which most investors receive financial advice and/or interact with financial advice providers.
1. Most Investors Will Need An Advisor
The reality is that most investors will need financial planning and investment management advice, and while there are many truly outstanding financial advisors who are well educated, with exceptional knowledge levels and with high morals and ethics they are sadly the exception and not the norm. I have been extraordinarily lucky, it seems, to have garnered a fair amount of media exposure given that I have spent only four years as an advisor. But when you consider that the attention was earned for essentially doing what I thought my job was (acting as a true fiduciary and trying to put the investor’s interests above anything else), it makes you step back and think about how broken the system really is.
There are many people out there who will manage their own affairs, and are perfectly capable of “Doing It Yourself” through rock bottom cost discount brokerages and Exchange Traded Funds (ETFs), and picking stocks or what have you. But for many reasons, these investors are the exception. I’m not worried about them – they’ll be fine. They are, however, few and far between in the grand scheme of things.
2. Active Management / Passive Management
With respect to the active versus passive debate, I have a few points to make. I’ve met many advisors who are much more experienced than I, much more educated than I, and much more analytical than I and yet the collective unwillingness to understand the core arguments of passive investing versus active investing is mind boggling. I should point out that my personal take on the matter is that the focus needs to shift from “active versus passive” to “active and passive”. The two can co-exist in portfolios everywhere. There are investors who are well suited for a purely passive portfolio, and there are investors who are well suited for a completely active portfolio, but I would venture to guess that there are plenty more investors who would be better off with both (the proportions of which can also vary). Just as there is a spectrum of the degree of allocation to equities/fixed income, the world might be better off if we start thinking about active/passive allocations. (Plus doesn’t it help you come to terms with a world in which both a Buffett and a Bogle can peacefully co-exist and are equally brilliant?) :)
3. Financial Advice Delivery Models
So why the lop-sided, great divide within the advisor channel? Over 70% of advisors are not even licensed to trade ETFs for clients (the vehicle of choice for indexing), and of the remaining 30% who ARE licensed to provide ETFs, I believe less than a quarter would use them regularly. So if you do some hypothetical math (using admittedly unscientific numbers) and assume that 90% of investors use an advisor, then only 25% of the 30% of advisors who deal with 90% of investors are even talking about the fastest growing investment vehicle in the world. That works out to under 7% of all investors in Canada. Given no shortage of data which casts a favourable light on lower costs and indexation, this is simply a broken system.
That advisors are supposed to act in the best interests of the clients while being predominantly remunerated based on commissions (which can further vary with different products) is purely laughable. Given that most indexation products do not provide commensurate compensation to advisors as active products, it doesn’t take a genius to see that the denial or reluctance to address the scientific and practical evidence behind passive investing is a textbook definition of justification of a cognitive dissonance.
The educational hurdle to becoming a financial advisor is low. I’ve mentioned before that with less than $500 and successful completion (60% pass mark) of a two-weekonline course one can qualify to advise Canadians on their lifelong finances and investments. Again, I want to point out that there are many great advisors who take it upon themselves to further their education and knowledge for years, if not decades. But again this is not the norm. Compare this to a doctor or lawyer who would have perhaps 5 to 10 years after having completed a university undergraduate degree before being fully accredited. Clearly the bar needs to be raised.
As well, personal finance education is sorely lacking around the world. In my opinion, the basics of money management needs to incorporated into the education system from the time that kids start learning math. Of course you would start with simple concepts like creating a budget, but it makes sense to teach people about getting your first mortgage, the importance of saving, credit scores, etc. Perhaps a mandatory requirement would be to educate people up to the level of how to deal with financial advice providers (because most people will still not be able to manage it all on their own), and to leave the nitty-gritty as electives for those who are interested in doing it all themselves or want to get into the industry.
So my choice to no longer remain a financial advisor is in part due to these factors. A colleague whom I very much admire once told me that in order to help try to change the landscape for investors and advisors would require remaining inside the industry to effect any real change. An alternative would be to walk away entirely and take a draconian stance on the way things are, but this type of approach has not worked well for others in the past (with respect to effecting change). So I have not left the industry, but rather have taken what may on the surface seem like a paradoxical role… which I will explain in detail tomorrow since this post has gone on long enough! :)
Thanks for all the well wishes in the comments section and in through personal emails – it is much appreciated