End the “Code of Silence” by David merkel, CFA of The Aleph Blog
I was asked to contribute to a survey recently, and one question made me think. It was a question about why don’t more people consult investment professionals, and What keeps them from doing so. I gave a fairly standard answer for me:
There are two reasons: first, most people don’t have enough income or assets for investment professionals to have value to them. Second, people don’t understand what investment professionals can do for them, which is:
They can keep you from panicking or getting greedy
They can find ways to reduce your tax burdens
They can diversify your assets so that you are less subject to large drawdowns in the value of your assets
After I wrote it, I submitted it for publication, but I wasn’t really happy with my answer. The thing that left me less than happy are the various tales that I hear where investment advice is subpar, communicated poorly, etc. Personally, I expect the real reason many people don’t consult investment professionals is fear of a bad experience, which may often stem from a a bad experience that they have had or a friend my have had.
- We don’t have a financial system where all financial professionals have to be under a common ethics code, with additional ethics code sections for areas of specialization.
- We don’t have a culture among investment professionals that really wants to clean up the system, and talk about abusive practices, such that they become well-known and go away.
- We don’t have enough of a culture among investment professionals that wants to genuinely educate the investors that want it, and in ways that don’t directly benefit us.
- Because we don’t have one unified theory of investing, there will be enough gray areas where people will still get hurt by professionals.
On the first point, I would note a recent article of mine on self-regulation financial markets, where I said:
The guy from the National Futures Association emphasized the idea that mandatory membership in the association as a requirement to do business was paramount for an SRO and I can see that. The SRO then has the “death penalty” hanging over the heads of those they regulate. That said, consider this: the CFA Institute may dream of the day when all involved in investing *must* hold a CFA Charter.
I have no doubt that this would be a good thing. Ethics codes are good for the industry, and to kick out bad apples would be a good thing.
On the second point, it would be worthwhile for financial writers and some larger firms to take on common practices that are abusive. This will be controversial, because not everyone will agree on every item, but even getting a stoplight list where red is bad practices, green is good practices, and yellow means be careful would be a good start.
On the third point, we need to advocate for the best practices even where it doesn’t exactly fit where our businesses make profits. Think of it this way: it often helps in home repair when someone who comes to fix one thing gives me some free advice on another matter that he doesn’t do, but sees it and tells me. That builds goodwill for a later date, because I know that person cares about me, and not just what I pay him.
On the last point, my earlier article went over many of the disagreements:
Ethics aren’t neutral; people disagree about what is right and wrong to a high degree. Even in finance, there are considerable disagreements in what is the correct behavior:
- Active vs Passive management
- Value vs Growth
- Does Technical Analysis work? (Is there truly a single discipline there? I don’t think so.)
That’s a considerable reason why it would be difficult to enforce the views of the CFA Institute over the markets. There is no commonly agreed-upon view of how the markets work. The views of the academics are ridiculous, and do not reflect market realities. But many asset allocators trust them, even though their results are poor.
But even if this results in some squabbles, at least people can be aware that there are differences of opinion, and maybe that can inform the way we talk to clients. Long only managers should tell their clients to buckle in, because they do not time the markets. Traders should tell clients that they won’t do well in choppy markets, and that methods to limit losses and let gains run have their limitations. Time horizons for investment decisions should be clearly identified, so that investors can set their expectations reasonably.
And that could be the best part of this: if investors have a good idea up front of how an investment will likely perform in a variety of scenarios, there will be fewer negative surprises, and hopefully, happy clients.
Anyway, that’s what I think the goals should be. Now, who else wants to make them practical, and be willing to speak up about this?