I’m a huge fan of Seth Godin’s work. He’s a presenter, author and entrepreneur and if you have any interest in marketing or business, you must subscribe to his daily blog. Anyway, his recent blog about the difference between how an amateur and a professional buys a service got me thinking, as concept applies perfectly to investing. I think many of us could benefit from approaching our finances more professionally.
The different between a professional and amateur
Often, a professional investor such as a fund manager approaches investing a lot differently than an amateur investor. I have listed some of these differences below to highlight this point.
– Understands that making investment decisions requires experience, education and understanding of the market
– Seeks out experts in their field and is willing to pay a fair fee for their advice
– Will have a methodology for hiring and firing advice professionals – a clear list of things they want and don’t want, thorough methodology, etc.
– Will hold their advisors accountable for producing results
– Won’t try and take on a task that is outside their sphere of experience
– They make investment decisions on a daily basis
– Will take almost any steps to ensure the risk of losing capital is low or non-existent.
– Has no metric or methodology for measuring the value of advice
– Asks friends or colleagues for advice
– Is prepared to have a go at trying to do it themselves before asking for help
– Considers it a saving if he works it all out himself and therefore doesn’t need to pay anyone for advice
– To some extent, is guided by emotions e.g. it feels right, falls in love with the potential returns, etc.
– Gets seduced by investment returns and doesn’t adequately consider (and mitigate) investment risks
– Doesn’t realise the danger of their lack of experience
– Makes a handful (or less) of investment decisions over their lifetime.
– Its prepared to make a mistake i.e. learn through trial and error.
But we don’t compromise on some things…
Imagine how you would react if your friend told you that he did his spouses dentistry work. Or wrote their own will. Almost all of us understand the perils (stupidity) of this and wouldn’t even consider trying. Instead, we find a professional that we respect and trust because we have what phycologists refer to as conscious incompetence. That is, we know that we have a deficit of knowledge and experience to do it ourselves.
Your responsibility is to manage the people that manage the money
Just because you can do your own financial planning, taxation, loan structuring – it doesn’t mean you should. More importantly, maybe you have misunderstood your role. Your role is to not figure it all out yourself. That is potentially way too costly in the long run. Instead, your role is to hire the best people you can afford to help you make the smartest possible decisions. It’s what we all do in other areas of our life. It’s what successful professional investors do too.
Use a professional lens when selecting the right people to have on your team
In order to do this successfully, you have to have a robust methodology for selecting the right professionals. Here are some of the things I consider when selecting other professionals that help my clients.
1. How do they make money?
It’s important that I work with strong and sustainable businesses. If the business isn’t sustainable, then they might not be around in the future to continue to help my clients and me. So, I must understand their business model, how they make money and ensure that doesn’t contradict with my goals. I want them to make a fair profit, not more or less. How they get paid should be transparent and easy to understand. And alignment of goals is good too e.g. they only make money when I do.
2. Is there overwhelming evidence that the results will be good?
I have written about the benefits of evidenced-based-investing in the past. Essentially, there must be strong evidence that utilising the investment methodology/approach has driven quality investment returns. If there’s an absence of evidence, then often the risk is too high.
3. Do I understand how they deliver investment returns?
I need to understand what has driven past investment returns. Is it luck or good timing? The market? Or their skill/intellectual property? Obviously, I’m only going to pay a fee for the latter.
4. Longevity – how long have they been in business?
How long have they been in business? This is important for a few reasons. Firstly, if they have been in business for many years/decades, they have navigated and experienced many markets and client situations. They have seen it all. Secondly, if they have retained clients for a long period of time, it provides strong social proof.
5. Exemplary ethics and morals
This one can be hard to ascertain but it’s still very important. I only work with “good” people. People that have pride in what they do. That want to do a good job. That get a kick out of helping people. Honest. Open. Transparent. Will always tell you the good, the bad and the ugly. Will always put their clients first. If there are any signs that the person doesn’t have perfect ethics and morals, no matter how small the sign is, be concerned!
6. Are they on the hook?
Accountability makes a big difference. Therefore, if the person giving me some advice will be on the hook for the outcomes of the advice, they will always do their best work. That’s why I’m a strong believer that financial advisory relationships must be long term. Because you want the advisor to be around to take responsibility for the outcomes 10 years from now (and beyond). They are on the hook.
Could you up your professionalism?
When you read the examples in the above table, which category do you fit into; professional or amateur? What improvements can you make to your approach and the people you engage to make it more professional? Its worth taking a moment to think about this as it could make a huge difference to your long term success. Good luck.