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I often start my talks to groups of advisors by asking how many of them believe in evidence-based investing. All hands go up. I then ask how many believe in evidence-based methods of persuading prospects to become clients.
This question elicits blank stares.
The disconnect between the rigorous, peer-reviewed data we require before making investment recommendations and the lack of comparable data when converting prospects into clients is an anomaly worthy of discussion.
You should know first that I have an unabashed passion for the work I am so privileged to do. Before becoming an advisor, I spent many years as an attorney representing investors whose savings were decimated due to the misconduct of their "market beating" brokers and advisors. For many of my clients, there was no effective redress. Some went from being solidly middle-class to working minimum-wage jobs. Others became acutely depressed, even suicidal, and totally dysfunctional. I saw many couples divorce, children forced to drop out of college and other emotional ravages of economic ruin.
Because of these experiences, I gave up my law practice and became an investment advisor. I was — and still am — convinced there is only one intelligent, responsible and evidence-based way to invest. It requires abandoning the notion that there are market inefficiencies to identify and exploit. Specifically, investors need to accept that stock picking, market timing and attempting to prospectively select outperforming mutual fund managers is a zero-sum game. Rex Sinquefield, the co-founder and former board member of Dimensional Fund Advisors, aptly stated: "So who still believes markets don't work? Apparently it is only the North Koreans, the Cubans and the active managers."
I counsel my clients to invest in a globally diversified portfolio of low management fee index funds, exchange-traded funds or passively managed mutual funds in a suitable asset allocation. The only trading is periodic rebalancing, unless a client’s risk profile changes and their asset allocation requires adjustment.
I can understand why evidence-based advisors find their work so rewarding. Every client who becomes a convert to this investment philosophy is one less victim for the securities industry, which is shamelessly geared toward transferring the wealth of its clients into its own pockets.
As an individual investment advisor, you can only reach a tiny fraction of investors who are likely to succumb to the misinformation prominently featured in the financial media and disseminated by the mainstream securities industry. For this reason, the next step in my personal journey was to write the Smartest series of investing books. All of my books are short, pithy and intended to demystify investing by educating and empowering investors. The success of these books prompted many other similar books. Collectively, they had an impact, and the pendulum started to swing toward index-based investing.
Despite this recent progress, there’s a long way to go. By some estimates, only 30% of investors own at least one index fund. It’s likely only a minority of index fund owners make passive funds their predominant holding. This means 70% of investors pay higher fees for actively managed funds that are likely to underperform comparable index funds in any one year, and especially over the long term.
In an effort to discover why I wasn't converting more prospects into clients, I spent a year researching scientifically based methods of persuasion. I found that the way I approached prospect meetings (which was similar to the approach of my colleagues) was inconsistent with overwhelming academic evidence. I completely changed my approach and my assets under management (AUM) soared. I published my findings in my book, The Smartest Sales Book You'll Ever Read.
I conclude my talk to evidence-based advisors by conveying my view that it is a "moral imperative" for them to succeed. When I meet advisors, I ask them what it would take for them to double their AUM. Most have no meaningful response.
If you are an evidence-based advisor, you have a lot going for you. The overwhelming weight of the academic evidence is on your side. Here's my bottom line suggestion for significantly increasing your AUM: Spend at least as much time familiarizing yourself with basic principles of evidence-based persuasion as you do learning about evidence-based investing. The first thing you will learn is the way you are attempting to convert prospects into clients may be the opposite of what peer-reviewed data suggests.
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read. He limits his sales coaching practice to advisory firms that advocate evidence-based investing.
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