Guarding yourself from experts

Ever heard the joke about what you call someone who graduates last from medical school? The answer is “doctor”. It means that no matter how good or bad someone was in medical school, they are still a fully fledged doctor.

It’s an interesting fact that groups tend to click together, and groups of experts are no exception. They also tend to eschew anyone giving anything remotely close to advice in their area of expertise. Of course there is a reason that these people are experts: they went to certain classes, studied key material, and passed some sort of test to earn their certification, degree, or designation.

Do you think this is enough qualification to totally hand over all your decision making to one of these people? It’s not. Amidst certified financial planners, lawyers, real estate advisors, and others are good, honest people as well as snake oil salesmen. Sadly, it is up to us to sift through all these people and find the best person for our needs.

The law doesn’t protect you from incompetent advisors

I often read discussion forums and usually at some point, someone makes an appeal of authority that a financial advisor with a series 6x or series 7 license will put you first because it’s the law. Sorry, but you see, you don’t know what you don’t know, and that expert you’re consulting doesn’t know what he or she doesn’t know. A double blind spot! It is a tough situation to deal with, because after all, that is the reason you are seeking an expert! This person may be constrained by his education (or lack thereof) and whatever training materials he has. He may also not analyze every vehicle or have certain prejudices towards or against particular products for various reasons. He or she may be putting you first, but that doesn’t guarantee your advisor knows what they are doing.

One thing I’m aware of is that academics, you know, the people with the PhD’s, don’t like something that carries the weight of academic research coming from someone who doesn’t have a PhD. My dad told me this, and he was a college professor who retired as the department head of Biosciences Engineering at a well respected university. This is why when people write popular books that are filled with a lot of valid information, littered with evidentiary footnotes, like “Killing Lincoln”, they will be looked down upon because the author wasn’t an academic. Why is that? Is it because the book was faulty? Or is it because too many people that are non-PhDs might make the academic community to appear to be not as expert as they claim to be? Again, this is where just because someone has a PhD it doesn’t mean they are the expert you need. In fact, the most valuable advisor you can find needs to be able to say, “I don’t know” in certain areas. You will find that really good advisors tend to network with people OUTSIDE their zone of knowledge. These are people that have a much better sense of what they DON’T know.

One expert who lived on evidence

For another historical example, look at the famous Albert Einstein. We’ve all heard of him. So what was his story? He was an evidence based physicist. For 400 years, people had made assumptions about the laws of motion. This went back to Newton, who was well established in academic circles as the father of the laws of motion as well as gravity. One of the biggest theories that had existed for centuries was referred to as the Galilean transformations. It was used to convert coordinates of motion between two frames of reference, such as a girl bouncing a ball on a train, as observed by a man on the platform while the train passed. Buried in the middle of it was the assumption that time passed at the same rate for both the girl bouncing the ball and the man standing on the platform.

Einstein essentially said that he couldn’t accept such an assumption without any evidentiary way to prove it. Seeing none, he threw the Galilean transformations out, and started to form his own theory. This allowed him to derive the Special Theory of Relativity, which demonstrated that time in fact moved at different rates relative to the motion between two bodies. While he had a PhD, he wasn’t able to get a teaching post and instead worked in the Swiss patent office until after he had published these ground breaking papers. In fact, in one year he published four papers (1905), including the one on Special Relativity.

Even then, he wasn’t immediately accepted by the academic community. After all, the core of his conclusions said that Newton was wrong! His papers on photoelectric effect had managed to earn him a position as a lecturer at a university in 1908. In 1911, he became a full professor and also predicted a very different outcome than Newton’s laws when observing stars near the sun during a solar eclipse. But his career hung on a thread. Only when that could be observed, would the academic community finally believe his papers on Relativity. It wasn’t until 1919 that such an observation was made, and it catapulted Einstein to amazing fame.

Einstein worked from an evidence based approach. He didn’t accept assumptions. His willingness to be a gadfly and put centuries old traditional theories on the shelf and formulate whole new ways to look at problems led to amazing breakthroughs that still impact us today. (Did you know GPS devices must account for relativity to get the accuracy they achieve?)

Guarding yourself from experts

There is a way to guard yourself when seeking the right expert. Ask for the evidence and evaluate it before making a decision. Learn how to read the research so you can cross check what they are saying. When a financial advisor recommends a mutual fund to you, don’t ask “how has this fund performed over the past 10 years?” Instead, ask them, “how have investors done over the past 20 years in mutual funds?” After all, isn’t that what you are trying to do? Your advisor may stumble at that request, or hem and haw. The truth is, that answer has been published year after for some time now. The Dalbar Report indicates that investors, on average over the past 20 years, get less than 4% average annual returns when they invest in mutual funds.

Does the person giving you advice have some actual performance history proving their own investment advice has worked, and longer than a 10 year period? Have they accumulated wealth, and did they do it by buying what they are telling you to buy? For example, look at what happened in 2008 when the market went negative. Most of the mutual fund management companies increased their fees. You see, they tell you to stay in, but they don’t share the risk with you. Instead, when people pull out of mutual funds, they take their own share out of the pot!

Are the people making big money on investment books making their money on the advice in the book, or the fact that they can sell millions of copies? Did you know one of the best ways to get a book published is to already have published one? That is because fans of existing works are much more likely to buy other books from the same author. That is why you hear about famous authors writing many books, and the publishers know this!

What about those that have TV and radio shows? There is nothing wrong with having a show. But think about it: would you make more money using their advice or managing to get your own TV show? (HINT2: Research shows that one of the best money makers is running your own business. Maybe you CAN start a radio show and make a killing! But there are other places to build your business.) So try and figure out exactly what your expert is selling, and figure out if his advice is golden. If it is, then it probably doesn’t matter what fees he is charging. He is probably worth his weight in gold!

UPDATE: Cross posted at http://www.turnquistwealthbuilders.com/2012/05/guarding-yourself-from-experts.html, the site where I now discuss all wealth building opinion.

I am not a licensed financial advisor nor an insurance agent, and cannot give out financial advice. This is strictly wealth building opinion and should be treated as such.

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