Advisor versus Advisee

Haven’t we all wondered about the usefulness of expert advice? How often do advisees implement the advice they receive?  Why do advisees pay substantial fees to their advisors, only to ignore such advice and do exactly what they wanted to do in the first place? The following quotes may interest or, at least, amuse you:

Advice is seldom welcome; and those who want it the most, always like it the least. – Lord Chesterfield, 1748, in a letter to his son.

Get the advice of everybody whose advice is worth having–they are very few–and then do what you think best yourself. –  Stewart Parnell, 1957.

Let the client talk. Don’t try to sell him what you’ve got to sell. Get him to tell you what his problem is and that will give you time to think about it. Try and give him the answer to his problem in his own words. He’ll think, ‘How remarkably clever this man is, he’s telling me exactly what I always intended to do anyway.’ – Siegmund Warburg, 1960s.

Advisers advise and ministers decide. – Margaret Thatcher, 1989.

Good advice is often contrarian. Investment managers, whose results are, unfortunately, compared only to those of their peers rather than to their fund’s unique objective, don’t dare move too far away from the consensus because, as long as his portfolio performs in line with those of his peers, his job remains secure

At the historic peak of interest rates in the eighties, when the consensus was that the bond market was dead forever, managers moved from bonds into equities. After the recent crash, managers moved from equities into record low yielding bonds. From my perspective, the very few advisors who recommended the contrary were discontinued or ignored, while the majority of advisors who supported the prevailing view increased their client base and augmented their advisory fee revenue.

In order to overcome this costly conundrum, boards and investment committees of foundations, pension funds and family companies  have to (i) become more diligent in selecting advisors and (ii) educate their board’s members.

Selecting Advisors

First and foremost, make sure that your advisors are not conflicted the way brokers and investment bankers often are.

Request copies of advisory letters written at the time of past peaks and troughs in equity, real estate, bond and commodity markets.

Be fully cognisant of an advisor’s methodologies, the length and depth of his historic data bases and his investment beliefs with regard to (i) growing income return versus total return, (ii) holding versus trading, (iii) style commitment versus style rotation and (iv) truly global versus US centred.

Educating Boards

Give each member annually a copy of Ibbotson’s SBBI year book (now Morningstar) and Dimson’s The Triumph of the Optimist (now Crédit Suisse).

Make board members understand why a percentage point of a manager’s under-performance against the benchmark in an up-market is forgivable, but under-performance in a down market is not.

Educate them to look at the equity and real estate markets not as a facility for trading perceived overvalued for undervalued paper (speculation), but as a place to select your fund’s partnership in the world’s finest and proven industrial, real estate and financial corporations (investing).

Adopt a rigorous mechanical re-balancing policy, with reasonable minimum and maximum percentage limits for each asset class, and then stick to it, regardless of whether the consensus is one of ‘irrational exuberance’ or Wall Street brokers jumping out of windows en masse.

Conclusion

If you implement a more rigorous selection process for choosing your advisor and if you are successful in educating your board and your investment committee, you will successfully navigate the Advisor versus Advisee conundrum.

Postscript

In order to understand this irrational behaviour, I consulted with Professor John Lyndon of McGill’s Department of Psychology. He informed me that this ‘Advisor vs Advisee’ behaviour is readily explained by well understood psychological phenomena like ‘Resistance to Prior Knowledge’, ‘Implementation Mindset’ and ‘Deliberation Mindset’. Space does not allow me to elaborate on his comments, but I learned that a committee discussing how to implement a previously set goal will be less effective achieving consensus and results, than one that deliberates on the appropriateness of that goal and then moves on to implementing it, perhaps in a modified version.

 

March 2011