A Response to Jason Heath’s Article in The Financial Post

The Financial Post published an article on 27 August 2018 authored by Jason Heath titled, “Relying on proprietary products not necessarily a bad thing for advisors.”  This article referred to research Credo has published.  Specifically, it points to an article which explains: Credo has found that financial advisors tend to use the products that are produced by manufacturers that have a direct affiliation with the dealerships to which the advisors are linked.  While fund product manufacturers that maintain independence from distribution  express frustration that this is a clear conflict of interest, Credo’s research also examined, but found no evidence that what we’ve dubbed “proprietary product loading” has any adverse effect on investors who are subject to the situation.  Certainly, not in terms of what we refer to as measurable investor outcomes.

The post you’re reading here is written with the intent of addressing the following paragraph within Mr. Heath’s article:

“In fairness, [Credo’s] “assessment” of [investors’] well-being was a subjective one based on survey questions as opposed to an objective one based on relative investment returns, for example. But the results were interesting nonetheless.”

This comment serves to diminish the apparent validity of Credo’s research.

Credo feels compelled to explain that our assessment  — no quotation marks needed — of investors’ feelings of well-being is both valid and objective; it was not subjective in any respect.  We will grant that it was based on the personal perceptions of well-being among investors.  Each of the tens of thousands of respondents in our ongoing Financial Comfort Zone study offered  a subjective assessment of their own circumstances, but that certainly does not render Credo’s assessment subjective.

Our work was (and is) an objective, sampling-based measurement of the perceptions of financial well-being circumstances within the population.  In fact, Credo’s work is much like the work of the financial auditors and managers who review and approve the financial statements of any company.  The difference?  Credo audits (using random sample-based measurement) investor sentiment rather than dollars and cents.  Still, our work is done with all of the rigor that any auditor might apply with their tools and techniques.

Credo ask the question: if you’re a financial advisor, which is more important:

  1. How well-off your investors think and feel they are relative to their personal financial expectations; or,
  2. The relative investment returns your suggestions are able to deliver?

Would you prefer to have your investors feeling comfortable and sleeping at night with investment returns of 4%? Or would you prefer a group of dejected investors whose investment returns were closer to 7%, but who were grumbling that they are not getting what they feel they are due?  Having studied financial advisors for more than a decade, we suspect we know your answer to this question.  The way Credo assesses perceived outcomes naturally incorporates each investor’s risk tolerance; reported financial outcomes don’t.  So, we spend our efforts measuring their perceived outcomes rather than their reported financial outcomes.  For that matter, at any given point in time an investor can tell you how they feel about their financial situation, but you can be almost certain they have no idea what their investment returns actually were in the last quarter.

Consider the analysis below, in Exhibit 1.  It compares the perceptions of financial well-being between investors who garner advice from financial advisors with the perceptions of financial well-being from DIY investors.

Exhibit 1. Ahead of the Game or Behind the 8-Ball — Advised vs. Unadvised Canadian Investors.

This assessment needs no quotation marks.  It is objective.  It shows that advised investors are significantly more likely to feel better off — regardless of returns — than investors who are DIY.  Table 1 below shows the evidence explicitly in a test of independence… all the way down to the calculation of the Chi Squared statistic of 1171 and its associated probability of 2.4156 X 10 raised to negative 252.  If you don’t like statistical calculations, ignore the table.  Effectively, it shows that there is almost no probability that the differences in these two distributions happened by chance alone.  Advised investors as a group feel better off than DIYers.

Table 1.  Test of Independence: The financial well-being of investors who are either advised or DIY.

In short, despite the fact that our work measures dimensions that are based on fundamentally subjective factors, the research itself is objective, significant and valid.  Ask us if investors who work with independent advisors — i.e., those who don’t have any affiliation with product manufacturers whatsoever and who aren’t compensated in any way by product manufacturers —  are better of for the fact that they consume fully independent advice.  Now there’s an interesting question!