The Two Best Ideas of the Past Half Century

Evidence Based Investing

I was recently reading through a book of quotations from Dimensional highlighting the power of great ideas. Some of the pages contain quotes from Professor Eugene Fama, author of The Efficient Market Hypothesis (EMH). Only a handful of years after Fama first wrote on efficient markets in 1965, index mutual funds were first introduced to the investing public. That opened up the previously mysterious investing world (at that time only accessible through commission paid brokers), to individual investors and paved the way for retail investors to control their own destiny. A truly worthy and compelling idea.

Closely related to Evidence Based Investing, (the application of EMH at the investor level), is the equally compelling idea of fiduciary financial advice. That is, advice centered on the individual, rather than a broker or salesperson. The emerging professional field of financial planning was launched in the early 1970’s, at roughly the same time that the first index funds became available. The idea then, as it continues today, was to provide sound, independent financial advice without hidden fees or gimmicks. In other words, a very transparent relationship instead of the transactional, sales oriented environment of brokers, banks and insurance firms.

“Free” vs. Fee

The combination of these two great ideas allows individual investors to access the global markets in a low cost manner and in turn render context in the form of financial goals, carefully honed and nurtured by a fiduciary advisor. While this is a powerful interconnection of ideas, perhaps only 5-10% of the investing public utilizes them. There are several reasons for this, but the most apparent is that engaging a fiduciary advisor costs money and buying financial products from salespeople is perceived as “free”. So, fee versus “free”. In terms of Evidence Based Investing, despite the decades of evidence, many investors still cling to the false hope that they can outguess the market. The facts are only 9.5% of active mutual funds outperformed the Standard & Poor’s 500 Index over the past five years ending August 31, 2016.

Fiduciary Financial Advice

What has become known as the Fiduciary Standard is something that we have embraced from the beginning of our firm. We have always been paid directly, and transparently, by our clients. We have long championed the fiduciary banner and thankfully, starting soon, at least for retirement accounts, those who render advice will be required to be fiduciaries. While this is imperfect, (since non-retirement accounts won’t be directly impacted), it should help investors have confidence that those who profess to be advisors are truly advisors and not salespeople in disguise.

These two ideas are unmatched in the sheer breadth of their impact on individual investors’ lives. We are pleased to have played an active part in the spread of both. Ready to put these two great ideas to work? Ready for a real conversation?

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