It’s probably bad form of me to slander my own profession, but sometimes it is roundly deserved. So today, I’m going to share some of the insights of Wesley Gray, Jack Vogel and David Foulke in their 2015 book DIY Financial Advisor.
“DIY” stands for do it yourself, of course. And that’s what Gray and his colleagues aim to do. The book shows how retail investors can replace an expensive financial advisor – who may very well be underperforming the market and offering nothing in the way of financial advice that you can’t get elsewhere for far cheaper – with simple, repeatable investment systems.
While a good advisor is still worth every penny you pay them, Gray and his colleagues make some solid observations on why an advisor is often incentivized to give truly terrible advice:
They focus on short-term rather than long-term results. All too often, investors tend to ask their advisors “What have you done for me lately.” All strategies have their down years, yet having a single underperforming year can get a manager fired. As investors, we tend to chase whatever is hot and drop whatever has recently underperformed. For this reason, a lot of professional managers feel pressure to become closet indexers, which negates their expertise.
The exploit their authority to generate business. Often, a manager will rely on their credentials to demand a higher fee than their service really deserves. Again, many managers are just closet indexers. There is no reason to pay a man in a suit a fat fee to do what you could do on your own for almost free.
They prefer complexity over simplicity. Complex models look impressive and help a manager justify a higher fee. But does added complexity actually make a model better? Generally, no. As Gray and his colleagues show, simple models often outperform more complex models and cost a lot less to implement.
Some of this may sound familiar to you. I reviewed Dr. Gray’s previous book, Quantitative Value, which was a case study in a simple but profitable model.
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