When does misinformation become disinformation?

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’.