Many readers felt that the criticism contained in a post last week on some of the conclusions drawn from a survey contained in a report titled The Value of Advice put out by The Investment Funds Institute of Canada’s (IFIC) report did not go far enough. They ripped apart the report’s junk science that found an association between households that received financial advice and their average investable assets.

First, the report makes no mention of what they consider as “advice”.  Canadian Financial DIY wondered if a mutual fund salesperson is really providing financial advice in the majority of cases.  Though the report doesn’t explicitly mention it, I think the survey simply asked respondents if they received financial advice. If they replied they did, the household is classified as an advised household.

Readers such as Andy took issue with the use of averages. After all, the significant percentage of Canadians who save very little have little in the way of investments and are quite unlikely to hire an advisor. But the survey lumps these households with those of DIY investors. Andy points out that if the advised group contains 10 households with $60K in assets and 10 households with $100K, advised households have average assets of $80K. Contrast this with the non-advised group which contains 10 households with no assets (and thus do not require an advisor) and 10 households with $140K. Clearly, the non-advised households are doing much better but their group average is just $70K. In other words, do not trust studies that show that if you put your head in the freezer and feet in boiling water, on average, you’ll feel warm.

Michael James on Money opined that, if anything, the causation goes in the other direction. It’s not that households with advisors have more money. People with more money are more likely to have an advisor because advisors prefer wealthier clients. He calls the IFIC observation as a bit like trying to lose weight by doing poor cannonballs when jumping into a pool because you’ve noticed that fat people do better cannonballs.

Canadian Couch Potato has a very funny take on the IFIC study:

This just in: A report by Mercedes-Benz finding that most drivers of luxury cars are wealthy, while less affluent drivers tend to drive more inexpensive cars. “We believe this is evidence that owning a Mercedes is the route to financial freedom,” says Mercedes spokesperson Meg A. Bucks. “If more Canadians trades in their current vehicles and purchased a Mercedes, we are certain they would become wealthy.”

The Unbiased Portfolio and Sean flayed the IFIC for pretending to do a scientific study and presented biased conclusions. After all, if you work your way back from the conclusions you want, 19 times out of 20, you can gather data that fits your world view.

This article has 12 comments

  1. You’re admitting that the data and the conclusions match, but calling out IFIC for imputing causality where there is only correlation. I’d like to point out that, while it invalidates their conclusion, it doesn’t prove the opposite conclusion, either. Some people are better off with an advisor, while others aren’t.

    I think the bigger question is: since advisors can’t guarantee improved returns, how do we measure the value of advice?

  2. @Robert: The IFIC report is based on a survey, not a scientific study. As pointed out in this post, there are a number of holes in it. It is true that the survey doesn’t prove whether advisors add value and it doesn’t disprove it either (those criticizing are not saying it does).

    I firmly believe a good advisor can add value to a lot of portfolios. Those who chase hot investments, invest based on what they hear in the media and those who trade too much might get better results with an advisor. IMO, how much good advise should cost is of lower priority than what I think is a widespread problem. Those who are paying for advice don’t receive much “good” advice.

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  4. Isn’t the more important question, ”where can different classes of investors go for good advice?” As someone who thinks about this a lot, I would like you to do a series on this topic.

  5. Thanks for the mention. I tried to add a little humour with my comment, but Canadian Couch Potato was much funnier.

    Dale asks an interesting question. If I had a good answer to where investors who need personal advice should go, I would have written a post about it already. I can point to many good sources of information to help people learn to be DIY investors, including the Canadian Capitalist blog, but some people need advice tailored to their personal situation.

  6. My faith in the “community” has been shaken to its foundation !!
    Does anyone but a complete dunderhead really believe that the Mutual Fund Industry in Canada has anyones interest but its own as a priority ?
    I have been listening to and laughing at their malarky for years.
    By rejecting their advice, thankfully I survived the Tech Wreck and the worst of the catastrophies that followed.

  7. @MichaelJames: Thanks for the mention, but your image of fat guys doing cannonballs was pretty sweet, too. 🙂

  8. I like the joke from Canadian Couch Potato. I would have probably used the example of people with 100 shares of Berkshire Hathaway BRK.A on NYSE being wealthier on average than people who don’t have nearly as many of their shares… LOL!

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  10. Junk science surrounds us. Self serving examples like this are misleading at best, but understandable because when done right steers people in the direction the perveyors of such studies want them to go. I am glad to see so many people observing the junk beneath the science and enjoy the funny examples they have come uhp with to illustrate the ridiculousity of the studies implied conclusions.

    Junk science is pervasive and in degrees becomes somewhat accepted, because most of us don’t have or take the time to verify. It misleads, confuses and wastes time, effort, resources & many other things. A much bigger issue like climate change has elements of junk science in it, perhaps to the point that the junk is piled so high that we can’t see over it to the truth.

  11. I studied Statistics as a minor in University decades ago though never really needed it for my work. However, one of the key principles I recall from the courses I took was the dangers of mixing up cause and effect and correlation.

    For many years, I’ve cringed when I’ve heard reports that “B” has been found to cause “C” when the truth may very well be that it is “C” which causes “B” or, perhaps just as often, that it is actually an unidentified factor “A” which might be causing both “B” and “C” together. It happens over and over again and it is the first thing I ask myself whenever I see a new study.

    However, although I would expect lay people who have not studied statistics to sometimes make this common mistake and fall into this trap, for IFIC to do so in this way is disgraceful.

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