This is a another guest article by Jim Stark. Jim Stark is a pseudonym for a practicing Canadian financial advisor.
So I hopped on to my computer one morning and typed in the phrase “scientific method” into my search engine to see what came up. Click here for the definition that our friends at Wikipedia use. Then read the following:
As far as I can tell, the preponderance of evidence supports the notion that the majority of active products and strategies fail to outperform and that the ones that do cannot be reliably identified in advance. It’s sort of like lottery tickets. The majority of tickets sold are losing tickets and the ones that are actually winners cannot be reliably identified until the winning numbers are called. The obvious rhetorical question that begs asking is: “Should advisors actively encourage their clients to buy lottery tickets?”
To be absolutely clear, everyone (advisors and investors alike) is entirely entitled to do what they personally feel is best. My concern is when people make decisions (and recommendations) without a reliable basis of factual evidence and fail to disclose that lack of reliable evidence. Is the question of appropriateness of approach one of fact or opinion? If it is a question of fact, there is considerable empirical evidence in support of passive products and strategies. If it is a question of opinion, then surely it ought to be disclaimed as such. What I find particularly telling is the notion of full disclosure. Irrespective of how you might personally feel about this conundrum, do you fairly disclose this fact/opinion and bring both alternatives to your clients?
Thanks Jimbo – ’till next time! -Preet