Conventional wisdom is not always wise.

This is a simple fact of life. Humans have been improving their understanding of the world since the beginning. Humans learn and we’ve learned some pretty great stuff in recent centuries. So much so that I can't complain about the grueling 36 hours it took to get from my house to my hotel in New Zealand for vacation this summer. Little more than a century ago, I’d be lucky to get out of what is today my county in 36 hours.

One of the habits of excellent financial planners is a devotion to lifelong learning. As the profession becomes more professional, there is a greater emphasis on relying upon science to make decisions rather than anecdotes, assumptions or “best practices”.

My column last month “New Research for Financial Planners” touches on a sampling of the growing body of knowledge fueled by real research by trained researchers. This is a terrific trend for planners and their clients.

Financial planning covers a diverse array of technical and non-technical subjects. It is a rich source of research topics.

If we planners are going to maximize the benefits of this trend, we don’t just need good research from good researchers, we need to be good consumers of research. How does one read research? I recommend taking a good class from a good teacher.

Dave Yeske is well-known in the financial planning community as a planner and a leader of the planning profession. He also earned his Ph.D. from and teaches at Golden Gate University. I took Dr. Yeske’s distance learning class, “Evaluating Research: Understanding and Using Applied Research in Your Practice” and I highly recommend the experience. The course carries 15 hours of CFP continuing education credit.

I anticipated that after taking the course I would be more thorough and able to appreciate good research more. This proved true. However, one unintended outcome of taking the course is that I find myself reading fewer papers in full which is saving me a lot of time. 

Over a five-week period, Yeske fed us a digestible diet of lectures, quick assignments and discussions about examples of what to look for when reviewing research-based literature so we could improve our ability to critically evaluate what we were reading. As important, he provided a framework for incorporating research into our policies within our practices. For a brief description of the course, student comments, registration link and to receive updates about the next offering, see this LinkedIn page.

In the meantime, I will share some of the basics with you.

 

Research papers should follow a standard construction of the following sections:

The introduction is just that. It states what issue the paper purports to address. I have found this section halts my reading more than any other. It stops me because often the premise is not compelling to me.

For instance, a study showing a high correlation between low educational levels and poor credit scores is interesting but not something I will spend much time on because in the few cases in which my clientele has poor debt management, the issue for me is getting them to change their behavior not what other people have done to themselves. A study on the apparent effectiveness of different techniques to help educated people change their debt management behavior would get more of my attention.

The section of a paper that most often spawns additional reading is the review of existing literature. This section helps frame the “newness” of the question being addressed in the paper. If I am wondering if this is just another safe withdrawal rate study or is offering a new twist on portfolio sustainability, this is where I would focus initially. In doing such, I often find citations that I suspect I might be interested in examining deeper.  

The methodology section will stop the reading sometimes too. The headline in a trade publication suggested that small cap stocks do not offer a premium, a direct contrast to accepted literature of the past. The methodology to come to that conclusion involved the hypothetical shorting of a slew of securities. That’s not practical, therefore the paper had no ability to convince me that investing in small caps in any traditional way was not likely to enhance returns.

Another methodology problem I am encountering with more frequency is the use of utility theory. Utility theory is a perfectly legitimate methodology. Utility analysis attempts to weigh the impact of conflicting choices based on preferences. The primary problem is there is a great deal of subjectivity as to the amount of importance placed on varying factors. Unless your client’s preferences align with the weightings used, the results may not be all that useful. 

 

Of course, even a sound methodology is of little use if the data being analyzed is not good. Good data depends on the nature of the question. What kind of data is appropriate to test the question? What kind of data is available? How much data was collected/tested? Was it enough?

The findings section is usually the part that gets all the attention. If not the findings, the conclusions will be the source of any headlines about the paper.

As a bit of a “research junkie”, I often find the final section of a good paper, future research, to be my favorite. I guess I enjoy the anticipation of more good things to come. I occasionally will make a game of trying to come up with other angles the authors didn’t.

With that basic structure in mind, Yeske advocates that we tackle the papers with the following eight questions in mind. You will notice that they align nicely with the structure I just outlined.

  1. What is the problem or question?

  2. How was the problem/question conceptualized?

  3. What are the key findings from prior research?

  4. What methodology was used to test the question?

  5. What were the results of the testing?

  6. Were the results compelling?

  7. What are the practical applications of the results?

  8. Will this change the way we practice and if so, how?

Research does not have to be directly applicable to the practice of financial planning to be important and of value but those last two questions are at the heart of my interest in research and fostering productive partnerships between the academic and practitioner communities.

Even if some research is impractical to apply in practice, I find the act of reading the papers more effectively and critically has helped me with clients. I have had several conversations with clients about how they can use these basic reading issues to learn to intake news in a healthier manner.

The emotion of this election has made the condition more acute but at any given moment a client can be exposed to something in some media that gets them riled up. 

For example, there is a fair chance one of your clients has cited an article showing that the S&P 500 does better with a certain combination of parties in the White House and Congress or that the market averages X in election years or Y when the party of the president doesn’t change or Z when it does.

 

Ask your client if they would be happy with your advice if you based it on a dozen data points. Hopefully they will see quickly that doing so is unwise. The data is inadequate to draw any conclusions. Their rational side understands this. Granted, this election cycle seems to have suppressed rational discourse, but there is value in helping clients try to reengage with that side of themselves and raise their standards for news intake.

I think market timing is folly, so I tend to attract clients that also believe that. Every day, someone in media suggests that a move is critical based on an economic forecast or other prediction like who wins the election. I am firm enough in my belief about market timing (the boatload of evidence helps me think this way) that when the opening to a personal finance column begins with such a suggestion, I stop reading and never think about it again.

In other words, the introduction was not compelling. Clients that do this or learn to do this from our coaching are far more confident in their plans and less stressed by news. They may have election stress for other reasons but not as much about their portfolios.

If you work on being a good student yourself, you may end up a better teacher for your clients.

Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at www.moisandfitzgerald.com.