John De Goey offers his views on the role of misinformation and disinformation in the advisory business
No one’s interested in something you didn’t do – “Wheat Kings,” The Tragically Hip
The terms misinformation in disinformation have been bandied about for some time. In particular, since the election of Donald Trump, there has been a great deal of ink spilled about the increased prevalence of both. The distinction is well understood by most people. Misinformation is simply an incorrect depiction, although it is often unwittingly wrong and often well intended. In contrast, disinformation is knowingly incorrect, designed to deceive, and fundamentally manipulative in nature. As such, although the two terms have much in common, there is at least a possibility that the former can be harmless, while the latter is always unambiguously deceitful.
The question people might ask themselves is: “is it possible for misinformation to shape shift and become disinformation?” Stated differently, “is it possible for people to benignly miscommunicate things initially, but due to never correcting the miscommunication, have seemingly benign words become something more nefarious? How long does something have to go uncorrected for it to be credibly depicted as a honest mistake? The unwillingness to disabuse listeners and / or readers of information that is knowingly incorrect calls into question the motive of the original communications.
Here's an example. In 2016, three researchers released a paper called “The misguided beliefs of financial advisors”. Among other things, this paper showed that Canadian mutual fund registrants had an overwhelming tendency to chase past performance, to run concentrated positions, and to pay virtually no attention to product costs. All three of these misguided beliefs are demonstrably incorrect and widely accepted and understood by the industry. Despite this, the evidence shows that an exceedingly large proportion of mutual fund registrants believe they're doing things properly when they chase performance, concentrate, and ignore product costs when making recommendations. The research constitutes smoking gun evidence that an adherence to false beliefs is widespread in the Canadian mutual fund industry.
Despite the overwhelming strength of the evidence, these false beliefs have gone entirely unaddressed for seven years. The first question most people ask when they hear about this is: “who is to blame?” There are some who believe product manufacturers are the primary culprits, others who believe it is product distributors (i.e., the advisory firms that employed the registrants), and still others believe primary responsibility rests with regulators who have a mandate to protect the public through the fair and efficient functioning of capital markets. There is enough blame to go around. In my view, all three of these groups share at least some of the responsibility associated with the misguided beliefs and associated harmful behavior. Collectively, I would refer to them as “the financial services industry”.
What I find appalling is that absolutely nothing has been done to correct these obviously misguided and egregiously incorrect beliefs. In fact, no one seems at all fussed by them. The undeniable conclusion cannot be avoided – not only do registrants believe things that are demonstrably untrue, but the entire industry knows full well that these misguided beliefs have taken hold, yet has done nothing to correct the problem. False beliefs have been allowed to persist.
To the best of my knowledge, absolutely no effort has been made to correct these misguided beliefs. No new courses. No new regulations requiring meaningful consideration of cheaper products with similar mandates. Nothing to curb concentration risk. In the interim, fund flows have continued along traditional, performance chasing lines with the lion’s share going to expense, actively-managed mandates – even though semi-annual SPIVA Reports demonstrate the collective futility of trying to pick winners, in aggregate.
To be absolutely clear, the ‘misguided beliefs’ evidence shows that registrants are not ill intended. Quite the opposite. The harmful advice mutual fund registrants give is offered because the registrants honestly believe it is correct. One might even go so far as to suggest the registrants have been ‘groomed’ or ‘brainwashed’ by employers, suppliers, and regulators. Think of them as being akin to the ‘patriots’ who stormed the U.S. capitol on January 6 2021 to ‘stop the steal’.
It seems likely that the industry’s silence regarding an obvious communication breakdown could be re-considered and re-characterized as deliberate malfeasance. Honourable people simply do not allow severe, deep-seated misunderstandings to persist for years if they honestly want us to believe they are acting in our best interests. The mutual fund industry has clear and robust evidence that it is failing its clients, yet it has done absolutely nothing to disabuse its registrants of the harmful tendencies that they themselves have instilled. Seven years on, the only rational conclusion we can come to is that what might have once been portrayed as benign misinformation can now accurately be described as deliberate disinformation. The mutual fund industry acts in a way that is consistent with the pursuit of profit maximization at the expense of consumer protection. It's shameful.
John De Goey is a portfolio manager at
