Supported by the Evidence

The term "evidence-based" is being used in almost all disciplines right now. I see it in finance, fitness, healthcare, design, parenting, and marketing. But it's just a simple way of saying "our approach is based on academic studies, history, and empirical research." On the surface that sounds straightforward. Who wouldn't want to work with a professional whose views are based on the evidence?

But it also leads to sanctimony. "Excuse me, are you evidence-based? Because if you're not, your views belong in the dumpster." The rallying cry amongst the best and brightest in finance today is simple: if you're not evidence-based, you're doing it wrong.

I never shut up about history, I prefer low-cost index funds, and I embrace risk premiums, so I fit into the evidence-based crowd. But I'm not happy about it.

People work with people they like. For better or worse.

If you want to pick stocks and wait for appropriate entry points into the market because your clients want that kind of advisor, have at it. If you use actively managed mutual funds that might have higher than normal fees but that your clients are comfortable with and will stay invested in, all power to you. And if you like telling stories about stocks or money managers and your clients eat it up and are having success as a result, excellent. The best investment plan is the one they can stick with.

I know the reaction from the evidence-based zealots when they hear any of that. "Do you have any idea how much you're being ripped off by your closet indexing, market timing, storytelling stock picker of an advisor!? Haven't you heard of the SPIVA report!? Of Eugene Fama and Kenny French!? Of the small cap value risk premium?!" Then they let out a deep sigh and roll their eyes.

There are zealots amongst the stock pickers, the active fund managers, and the storytellers too. But what makes the evidence-based crowd insufferable is their retreat to—and please read this in the voice your sibling would use to mock you—"well, at least what I believe is supported by the evidence."

We can't be all things to all people. The evidence tells us what works, but it doesn’t dare suggest it’s what people want. 

Investing is more behaviour-based than evidence-based. And good investment behaviour comes from a solid relationship. One based in trust and communication.

An evidence-based advisor can still be a bad advisor, and a non-evidence-based advisor can still change someone's financial life for the better. 

Unfortunately, I have no evidence to support that claim. At least not yet.