Perspectives of a Financial Adviser (Part 3)

I have been presenting some excerpts from an e-mail correspondence I had with a financial adviser a few months ago.

She continued:

     > The status quo is to calculate the return by
     > acceptable methods… and report it “as is” for
     > investors or advisors to interpret as they see fit.

I would argue without knowledge of statistics and system development, neither investors nor advisers are in any position to interpret that return. The adviser is usually the one left to do the interpretation and I can only hope s/he has a thorough understanding of scientific methods and statistical testing like those publishing in peer-reviewed journals.

     > …I’m not suggesting that he cherry-picked returns.
     > He cited his sources in the usual way (where the raw
     > data came from, and that it was manipulated). This is
     > all that is required to be in compliance… This
     > strategy avoids the appearance of overstating the
     > performance as [statistical] significance might do for
     > readers who don’t understand the limitations of
     > [statistical] significance. It’s the job of the
     > compliance officer and the publishers of the magazine
     > to protect… from law suit[s]. “Average” is perceived
     > as a less complex and therefore less dangerous term.
     > Averages don’t assert anything, they simply get
     > reported, and readers make meaning for themselves.
     > “Significance” is a term that may implicitly overstate
     > findings to a degree that may mislead unsophisticated
     > readers, putting the writer/magazine at risk.

This was shocking to me. Advisers should not publish statistical analysis because they may overstate importance to the uneducated reader? In my opinion, statistical analysis is necessary to suggest a difference might be meaningful. And only the author can do the statistical analysis since the entire data set is rarely (if ever) presented in the article itself.

     > This fear of overstatement runs through everything
     > from professional signatures to performance reporting.
     > Implied guarantees or overstatement are very common
     > compliance concerns across the industry. It would be
     > for these reasons that I would guess Craig kept his
     > calculations so simple…

This tells me that the compliance officers give advisers (authors) carte blanche to publish anecdotal information rather than statistically tested, validated data. It’s like optionScam.com everywhere. I find this extremely disconcerting…

…but I will continue next time, nonetheless.