Quite possibly THE singularly most important issue that can be dealt with when considering money.
This is likely to be a rather lengthy and ongoing discussion, so go make a coffee (or tea or whichever version of calmative you prefer), lean back and open your mind just that extra little bit. There are more issues at stake than you are likely to be thinking right now, and it is going to take a healthy dose of openness for clarity to find its way to you.
Firstly, let’s make a few bold and broad statements:
- It is not possible to remove all bias from either advice, or the decision-making process.
- Legislation (at least, in Australia) specifically confirms that there must be a bias when making a recommendation.
- Attempting to be purely objective will lead to further bias.
These are quite strong statements and require a good deal of clarification before we are going to be in a position to use any of the conclusions that we reach.
However, i’m not going to start by clarifying the statements at all. i’m going to start by looking at how the provision of advice, leading eventually to a recommendation, comes about.
Let’s begin with a recommendation that you may give to someone else. What will you base that recommendation on? What experiences have you had? What training have you received and what knowledge have you accumulated from all of that?
The answer is that the recommendations that you provide will be heavily influenced by the experiences you have had. It is extremely unlikely that you have personally worked through all the investment or strategy options that are available. It IS however, very likely that you have been exposed (either directly or indirectly – such as through family, friends or acquaintances) to a more limited number of processes, which have in turn, exposed you to a limited number of outcomes in each of these areas.
We then have a related but separate issue of your own personal memory and impressions of the outcomes that you have been directly involved in. Even if you obtained a positive financial outcome from some past effort, you may have come away disillusioned by the process or with an outlook that is not actually representative of your financial outcome.
OK. Time to take stock of what i have just said and consider some examples …
- You will base your recommendations on your own experiences – both positive and negative.
- You may have purchased your own home at a good price and have come to believe that this is a very good idea.
- You may have invested into a commercial property and have benefitted from years of strong rental growth and solid real estate prices.
- You will base your recommendations on your own training.
- If you are a stockbroker, you will logically favour investments into listed securities such as shares, stocks and listed trusts.
- If you are a real estate broker then you will logically favour land/ housings/ buildings as a source of investment wealth.
- If you work for a bank or bond trader, you may consider fixed interest investments the best/better/most appropriate form of wealth.
- You will base your recommendations on your impressions of both of the above.
- Always remember that you are only human (a little humility is a graceful thing…). You may have learned all about share investing and done quite well yourself but feel that you were “lucky” and be uncomfortable that others would be quite so lucky.
- You may have bad experiences of residential property investments yet your training suggests that it is appropriate as a place for other people’s money. Your impressions will be varied as to likely outcomes.
- You will base your recommendations on your observations of the world around you.
- You may have friends who have done particularly well/badly through investments into particular areas.
- You may be impressed by material that you read or hear of. The investment decisions of Warren Buffett (one of the world’s richest men and a key driver of the long term returns of investment company Berkshire Hathaway) and feel that the observations made by him have more weight than other commentators or participants in the financial markets.
This is only a very quick and superficial look at some examples of influences that would help to lend a bias to any recommendations that you may make to other people.
The scope for bias is much, much greater. For example, if your job is to make recommendations to other people then you may be employed by a person or institution that has their own commercial bias. This is an area that scares many people, as they are unsure of whether there are hidden financial benefits to you or your employer in recommending one financial strategy or investment over another.
An example of a commercial bias would be a large institution that requires its representatives to only recommend products or strategies that utilise the institutions products or services. This is an area in which Australian rules and regulations that impact financial planners can actually be seen to encourage this type of behaviour. We will cover this in lots of detail over time but for now we’ll just look at the basics. In Australia a financial planner must hold an authority to give advice and that authority is issued by a holder of an Australian Financial Services Licence (referred to as an AFSL licence holder). There is a requirement that due research and investigation is made into any investments recommended by the advisor and to help make sure this is met there will be an Approved Product List, which sets out products that are available for the financial planner to recommend. Can you begin to see the problem?
In many cases, that licence holder is also a provider of investment and insurance products. They will often limit the listing to products that they provide. In other words, the financial planner is required to only recommend from that range and, by definition, will be biased in the advice provided. This bias has become rather murky over the years, as large institutions allow investments into other institutions’ products. However, that has done very little to reduce bias.
Try to remember that we are not talking about bias being “good” or “bad” at this stage. We are simply looking to see where it may exist and what might be its cause.
Sometimes there may be an ideological bias. An example of this would be the tussle in Australia between a group of retirement and superannuation funds that refer to themselves as “Industry Funds” and “Corporate or Retail” funds. The very public debate on the relative merits of each approach is a very good example of the types of bias and “hidden agendas” that a casual observer would have difficulty interpreting.
Therefore, one of the first questions to ask yourself when you are giving or receiving advice on financial issues is, “What bias is obvious or hidden in the recommendation being made?”