Alistair Cunningham: Why advisers shouldn’t listen to ‘experts’

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Whatever your opinion of the man, Michael Gove’s statement over the summer that “people in this country have had enough of experts” clearly resonated with many.

The problem with experts is that they are fallible humans, who make judgements based on past experience. They are also clouded by self-interest, so do not necessarily act with impartiality.

As financial planners, we often have dissenting opinion masquerading as expertise competing for our attention. Part of our professional skill is to approach these views with the highest level of impartiality.

The average fund manager knows more about their sector than the average planner but the reason most firms will have an investment committee is to ensure consistency and avoid recommendations being tainted by one fund house’s convincing presentation to one adviser.

That is not to say it does not happen. Whole firms have been persuaded “expert evidence” proves one investment style is superior to another. Even the Nobel committee showed an appreciation of the subtleties of the active versus passive management debate, giving the 2013 Prize in Economic Sciences to Eugene Fama, who showed markets are efficient, and Robert Shiller, who demonstrated they are not.

In a recent article for Money Marketing, Paul Lewis’ cherry-picked data showed managed cash from a diverse range of deposit takers might, over some time periods, beat a portfolio of UK equities. To many laypeople, Lewis is the face of financial expertise, so it is dangerous when he declares “cash beats shares and here is the proof”.

Of course, the same data produced to today would show very different results due to the depreciation of our currency and correlated appreciation in the FTSE 100. It is also notable that if you diversify and manage the equity content in the same way as the cash there would be a different outcome.

Ironically, one investment research consultant took the time to debunk Lewis’ data and then cobble together his own conclusion that all multi-asset funds were “worse than brainless”. I assume no professional adviser has changed their strategies based on either expert’s view.

Many of these experts have limited, if any, experience in dealing with the real issues clients face. Advisers know that the investment strategy for a 65-year-old who inherits £500,000 will likely be different to the £500,000 they have built up over their lifetime in their pension. This is about attitudes rather than any tax, or even risk-profiling, decisions.

According to a survey paid for by an annuity provider, almost 70 per cent of individuals want guarantees on their retirement savings. Does this mean 70 per cent of individuals should purchase an annuity? Of course not. We need to apply some common sense to these findings (if we are to pay them any notice at all).

All of that said, the alternative to experts is more insidious. In a world devoid of experts, decisions would be made by blind faith, rather than the use of collective wisdom. What we need to be especially careful of is those who disseminate their knowledge with an air of expertise but whose evidence-based claims are nothing more than orchestrated displays of faith.

Alistair Cunningham is financial planning director at Wingate Financial Planning