{"id":1019,"date":"2011-09-30T18:17:57","date_gmt":"2011-10-01T01:17:57","guid":{"rendered":"http:\/\/www.marketriders.com\/blog\/?p=1019"},"modified":"2016-12-21T07:34:31","modified_gmt":"2016-12-21T15:34:31","slug":"what-makes-you-trust-anyones-investment-advice","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/what-makes-you-trust-anyones-investment-advice\/","title":{"rendered":"What Makes You Trust Anyone’s Investment Advice?"},"content":{"rendered":"

It is well documented in surveys and studies by financial institutions that when we seek investment help, we make choices based upon one major criterion: trust. It all boils down to this one word. Who is giving me the advice? Can I trust them?<\/p>\n

If you are a hard-core do-it-yourself investor who loves to day-trade, you may trust the Motley Fool or the Daily Options Trader based upon the success of their recommendations. If you delegate your investing, you may trust your friend\u2019s son who works at Smith Barney. You know, the one who got his Wharton MBA and plays with your kids.<\/p>\n

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Conmen and Ponzi scheme operators know how to get our trust by playing with our fears and our greed. The SEC knows it can\u2019t regulate trust, but it does regulate how advisors engender it. Thanks to laws from the 1930s, an investment advisor cannot advertise testimonials from other clients. That\u2019s why you never see advertisements showing celebrities like Oprah crowing, \u201cJoe Morningstar is my favorite money manager! He helped me buy this estate in Maui!\u201d In fact, social networks are panicking many investment advisors today. We wonder: If a client \u201clikes\u201d you on Facebook, is he endorsing your service and leaving you open to an SEC investigation?<\/p>\n

We may look at past performance from mutual funds for trust. But this has been proven fallacious at best; thus the fine print noting that \u201cpast performance is no indication of future results.\u201d And as we\u2019ve written many times, the game of performance reporting is rigged. A bad mutual fund can buy up a high-performing one and just assume the latter\u2019s track record.<\/p>\n

But when it gets down to it, we must trust someone or something before handing over our dough.<\/p>\n

Unfortunately, most investors fly blindly without ever thinking through the question of, \u201cWho should earn my trust and why?\u201d We continually encounter investors who own a variety of mutual funds, pay enormous fees, and have no idea that they are engaged in \u201cactive\u201d investing. They believe that if they are buying products from a large institution, then they\u2019ll achieve their goals. We meet investors who have delegated managing their money to an individual because he was on the Barron\u2019s \u201cTop Financial Advisors\u201d list. Others find status by being able to say, \u201cI\u2019m a Goldman client.\u201d<\/p>\n

Giving our trust is a complex emotional dynamic that we\u2019ll leave to the shrinks to articulate. But what can we learn about trust from the smartest investors in the world? Do the trustees of Yale sit with prospective hedge fund managers, look them in the eye, and then have a discussion about who has better eye contact and a more confident handshake? No. They develop investment trust, not by emotions or instincts, but through a logical evaluation of three dimensions in the following order:<\/p>\n

1. The process.<\/strong> First and foremost, smart investors invest with an investment methodology. They adhere to a philosophical approach that they believe to be true about investing. For instance, Warren Buffett fans believe in buying out-of-favor, inefficiently priced stocks and holding them until everyone else changes their opinion. At MarketRiders, we focus on finding the right asset allocation and then recommending low-cost ETFs and a consistent rebalancing protocol. Vanguard fund owners have generally bought into the idea that low fees will make them more money, so they like passive investing instead of active investing. Whether or not you know anything about investing, you need to spend some time learning about the various investing \u201creligions\u201d and developing your own point of view.<\/p>\n

2. The institution.<\/strong> Institutions come and go, as we\u2019ve seen with Lehman Brothers and Bear Stearns. A \u201cWall Street Legacy\u201d is an oxymoron. The names come and go. But doing business with a firm with a culture and track record of delivering on your process is nonetheless vitally important. The firm needs to be solid and have checks and balances and high standards of compliance. Why does Vanguard have over a trillion dollars under management? Because Jack Bogle\u2019s original vision to help working Americans by building a not-for-profit organization has remained intact. Vanguard continually lowers its fees as it adds assets, and it adheres to its process of passive investing.<\/p>\n

3. The person.<\/strong> If you have a belief in an investment process and have found an institution that embraces that process, then trusting the individual with whom you work becomes the last piece of the equation. You can make sure the individual has not been sanctioned by regulators and ask for background information. But make this is the last piece, not the first, for establishing trust. Trusting people and institutions before you\u2019ve first developed a core belief about investing gets the whole thing backwards. Spend the time to understand the various investment philosophies and then develop your own point of view. Then look for people and institutions to help you implement it.<\/p>\n

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