For Better Performance, Move On From So-Called Best Practices To Even Better Practices

Wednesday, November 28, 2012 15:32
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For Better Performance, Move On From So-Called Best Practices To Even Better Practices

Tags: benchmarking | client service | financial advisor | investment advisors | portfolio construction | target date funds

 “Best practices that are not common practices are merely someone’s unpopular opinion.” So says Nevin Adams, former editor of PlanSponsor magazine.

 

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This suggests that the words “common practice” and “best practice” are synonymous. In support of Nevin’s view, we all say we use best practices, so best practices must be common practices because we all use the same practices. Make sense? Here’s another way of stating the same fact. We all use the same practices, so they are common practices, and we all say that we use best practices, so best practices must be common practices.

 
So why make the distinction? Clients want the best so we tell them what they want to hear. But what if there really were better practices, superior ways to provide advice and guidance? What should we call these advances? How about “even better” practices? “Even better” practices eventually become common practices but it takes a long time because we are all hard-wired to resist change. Modern Portfolio Theory took 50 years to become common practice, replacing the performance horse race, and now it’s “Old” Portfolio Theory at age 62.
 
Businesses and governments have a natural tendency to cling to "yesterday's successes" rather than seeing when they are no longer viable. Peter Drucker, renowned business analyst and consultant, understood the dilemma and advocated “Planned Abandonment,” which is a pledge to abandon processes that have been working in favor of processes that work even better.
 
Here are some examples of “best” practices that should be replaced by existing “even better” practices. Would you agree? Can you think of some others?
  • Mean-variance optimization
  • Indexes as benchmarks, especially style boxes
  • Standard deviation as a measure of risk
  • Peer groups
  • 4-style-corner portfolio construction
  • S&P 500 as a core portfolio
  • Almost all target date funds

 

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