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Practice Management

Separate the Wheat from the Chaff

We have more access — and easier access — to information than at any time in human history. And a good fiduciary can identify which of it will most affect clients and their accounts, argues a recent blog entry.

In “A Fiduciary Must Separate the Wheat from the Hype,” Christopher Carosa argues that a fiduciary must be able to sift through the information available and any popular overexcitement there may be about any particular development. “A good fiduciary,” he said, “needs to see through the hype and base decisions solely on matters of import. Of course, they first must separate the wheat from the chaff to determine what is news and what is hype.”

For instance, Carosa says, a participant who watches financial networks and read publications the cover financial matters may become enamored of a particular financial product or strategy and insist that the way his or her funds are adjusted include it. But a good fiduciary, must “get past the hype behind the employee’s request.”

“Hype surrounds us. It can present a minefield for the inattentive fiduciary,” Carosa says. But he warns that it’s easy to fall prey to it, noting that repeating headlines can influence priorities. Not only that, he argues, “hype, like humor, works because it’s based on truth. This mantle of credibility is just enough to lead the fiduciary astray.”

Carosa says that yielding to the temptation to respond to such influences “is a form of the behavioral anomaly known as ‘recency’ — placing undue emphasis on something that you’ve seen most recently.” 

Giving in to that can “skew the decision-making process,” Carosa says, but argues that it is unacceptable for a fiduciary to use sentiment based on recency as the premise for actions and adjustments with clients’ investments. “If you’re serving in a fiduciary capacity, you don’t have the luxury of using the “recency” excuse as the reason for making what turns out to be an uninformed decision,” he says.

How can one overcome recency? Carosa suggests allowing some time to elapse before making a decision; giving an idea “time to percolate” before taking action on it. When it comes to adding funds to the plan menu, there’s no problem waiting a few years to test the durability of the portfolio manager. Plan policy changes, unless mandated by regulators, may take longer,” he says.

The risk of long-term poor performance “poses a greater liability threat” than missing a chance to make short-term gains, Carosa argues.