October 26, 2018

Episode 17: Dan Solin: Evidence Based Investing: Sticking to Science When It Comes To Your Money

October 26, 2018

We welcome a good friend and someone who has had a massive influence on our lives and work. Bestselling investment author, Dan Solin, joins us on the podcast today. Dan has been a staunch advocate for evidence based investing for a long time now and although this approach is still far from dominant, it has grown immensely in the years he has been active. His focus on smart, client-centered investing has set the standard for a certain portion of advisors in the US and Canada, notably the ones hosting this show! In our conversation, we chat about Dan’s history and the foundations of his professional philosophy. We get into some of his work as a lawyer and how this influenced his overall career trajectory. Interestingly, we spend some time on the topics of happiness and kindness and their integral importance to financial success for any investor. For an inspiring and thoughtful conversation with a true industry leader, be sure to tune in!

Key Points From This Episode:

An overview of Dan’s career and his investing philosophy. [0:03:05.9]
Dan’s training as a lawyer and how this influenced his evidence based approach. [0:05:45.0]
The case that prompted Dan to a proactive strategy for fairness. [0:06:45.1]
Dan’s on air disagreement with CNBC’s Jim Cramer. [0:08:52.6]
Looking at the culture of active fund management in Canada. [0:10:59.1]
The time Dan spent on the concept of happiness in his latest book. [0:14:45.5]
Building trust with clients through genuine interest. [0:15:56.8]
Looking at the difference experiences of introverts and extroverts. [0:18:32.0]
The critical importance of empathy in all aspects of life. [0:19:40.7]
The full extent of what a wealth advisor should do. [0:21:06.9]
Perspective and care as two primary directives for advisors. [0:23:45.4]
The retirement-focussed project Dan is currently working on [0:26:05.8]
Dan’s own journey and struggles around happiness. [0:28:43.6]

Read the Transcript:

So you have a varied and really interesting background. So I was hoping to off, you could give our listeners a bit of a high level overview of your career and the path that you've taken to where you are today.

So I started out life as a trial lawyer in New York City, and I practiced for many years there. At the tail end of my career there, I was representing investors who'd been seriously harmed due to the misconduct of their brokers, which got me interested in the securities industry. So I started ... As a lawyer, you're confronted with facts that you had nothing to do with putting together and you just have to deal with those facts. It was very frustrating, because it's difficult to get money back once people have lost it. So I saw the devastation that those people had suffered. And I tried ... I was thinking of how to come up with a way to ... Prevention rather than cure.

So I started writing books. My first book was called, Does Your Broker Owe You Money? And then I wrote a series of investing books intended to keep investors on the right path. And then at the same time, I became a wealth advisor trying to do the right thing for investors, following the same investment philosophy that the two of you follow with PWL, an evidence-based philosophy based on strong academic support, rather than kind of musing and an intuition. From there, I was just kind of curious as to why I was fairly well known for writing books, but I didn't seem to be any better at converting prospects into clients than people who weren't as well known as I. And so I just took a year to study neuroscience and how the brain functions, and why people react the way they do. Really it was part of a self-improvement program, but that turned into a book called the Smartest Sales Book You'll Ever Read. And then that book turned into a consulting career where I now wander around wherever people will have me, trying to help evidence-based advisors like you, who are doing the right thing for their clients. I want you all to be as successful as possible, because I fully understand better than most that every time you convert a prospect into a client, you've saved that prospect from the ravages of the traditional securities industry.

That's so interesting, Dan, and I've known you now well over 10 years, and the common thread that I see in you is evidence. Your career started in evidence and continued on through the securities industry and then also helping advisors, then into sales. Why and how does evidence plays such a big role in your life?

Well, I think it started, Cameron, when I was a lawyer, or actually in law school. In law school, your opinions are worth nothing, but the data is worth everything. Meaning prior cases are worth everything. And so we're trained to be very rational, dispassionate, and to find support for whatever position we're taking and to try to persuade a judge or jury that our support is better than the support Marshall buyer adversary. So I think that training is what led me to be so susceptible when I learned, and it was a big epiphany for me, as it may have been for the two of you, that there was actually a better way to invest that wasn't ... It didn't depend on somebody's opinion of the day or some expert, but there was sound peer review data. It just made perfect sense to me and always has.

So Dan, while you were a lawyer, obviously you saw a lot of different cases. Do you think that there was a specific turning point that you realized that you needed to actually get on the ground and start helping people?

There were a number of cases that I had been where it was so clear to me that the lives of my clients had been completely ruined by reprehensible conduct of their brokers. But over here in the States, we have a very unfair system that requires investors to go before, basically, tribunal administered by the securities industry itself. They don't get access to courts and to a jury of their peers. So winning these cases was very difficult. And there was a guy, a pig farmer from Georgia, who had an eighth grade education who had inherited a couple of hundred thousand dollars from his uncle, and who called me from the library collect because he couldn't afford the phone call at the time. And he lost it all to a broker who invested in penny stocks. Absolutely devastating. And he was terribly sick at the time. It was a horrible story. It really tugged at my heart, and I lost that case, and that's when I just said I really have to be more proactive. I just can't wait for the system to catch up with fairness and justice. It's never going to happen.

Incredible. One of the greatest examples that I can recall of you in the public forum doing just that was the time you were on CNBC, and the financial stock picking station. And you made the comment that they should play more in Vogle we trust as opposed to in Kramer in we trust, contrasting the difference between Jack Vogle, one of the evangelists of index passive investing, and Jim Kramer, who at best as a bombastic active stock picker on CNBC. And I remember that I tried to find it. It's no longer online, but the article is there. But you made the point that indexing makes so much sense, and that just set him off. Can you tell us about that episode?

That actually was a pretty dramatic event in my life that I enjoyed immensely to this day. So thanks for reminding me about it. I was invited quite frequently to go on CNBC. I think more as a punching bag than anything else, because my position always was evidence-based investing makes sense, stock picking, market timing, trying to pick out performing mutual fund managers. Basically the daily grist of CNBC is just misleading. And Kramer was an object for me of many, many blogs, because I felt ... I didn't buy that he's just entertainment. I really felt that his program really harmed investors, and that really affected me.

So at that last ... What turned out, not surprisingly, to be the last time I was invited to go on CNBC they gave me one of those openings where they said, "Tell us what you think investors should do and how to deal with the problems." I said, "Well, why don't we start with me telling you what you can do." They said, "Okay, great." And I said just what you said. I said, "You should have more in Vogle we trust and less in Kramer we trust." Kramer was in an adjoining studio and heard that, and then came on and engaged in what I call a bug eye'd rant, in which he just attempted to justify the unjustifiable. So that did create quite a stir. But I think that was around 2009 or so. And of course everything had happened since more than justified the position I took. The funny thing is, I'm not on the air on CNBC, and he still is. And that just shows you how important the work you're doing is.

I think we see that everywhere, not just in the United States, but also in Canada. Most of the programs on any financial media television show, it's all about active management and what's going on in the market and what you should be doing, and almost nothing about evidence-based investing.

I actually think, and you know that I love Canadians. I think it's a wonderful country and with wonderful people. So I say this from a point of view of really kindness, but I think what goes on in Canada is, in some respects, even more insidious than what goes on in the US. Because you've got the domination by five major banks who have a lot of conflicts of interest and have a lot of ability to cross sell. And instead of using that tremendous leverage for good, to a large extent they use it to perpetuate the sale of actively managed very expensive products. And by doing so, they're really no different or better than brokers are in the US. Where they're more dangerous is that they control much more of the market, so they can do much more harm. And in fact, they do.

And we see exactly that in Canada. With people like you spreading the message of evidence-based investing in the United States, the RIA model has grown substantially. And I think evidence-based investing is getting a bit of a foothold. It is getting a foothold in the United States, whereas in Canada it's still a tiny, tiny fraction of the overall asset.

I wonder why that is. I think we're up to around 35 to 40% of individual investors in the US are evidence-based investors. And I think you're hovering around 5%, is that right?

So maybe people listening to this podcast who are looking for a career with potential will become evidence-based advisors, because I see a tremendous future. Logic ultimately prevails. It did here. Nobody predicted what happened here. Many of us, not just me, who have been writing about this for decades, marshaling the evidence. And it did feel like we were talking into a deep hole and nobody was really paying any attention. And then there just was an inflection point where I think the mountain of evidence was so overwhelming it could not be denied. Although active managers are still making, I think, pathetic efforts to justify their existence. But it's not based on evidence. It's just based on rhetoric. So I think you're going to see it there.

This goes back though to Daniel Kahneman's book Thinking Fast and Slow. Understanding the evidence is not easy. And we know it's very hard to change people's minds. People have to get there on their own, and once they do, that's when we finally reached out to firms like ours. Do you agree with that?

I do agree with that. And the problem I struggled with here, Cameron, and that I think is a common problem in Canada. Sometimes ideas are so big that people can't wrap their arms around them. And I used to get this comment all the time. If you're right, Goldman Sachs is wrong. How can that be? And that's a tough argument. So if you're right, five of the largest, most prestigious banks in the world, I would say, they're based in Canada, they have to be wrong. And it's very, very difficult for people to accept that, even though I could convince any jury that that's right. But convincing individual investors is very challenging.

So we're going down a bit of a rabbit hole about the investment industry, and investing in general in Canada and the US. But in your most recent book, one of the things that we wanted to talk to you about came from that. So in your most recent book, it wasn't about happiness. It was about how to get through to potential clients and work with clients. But you ended up talking about happiness fairly extensively. So we wanted to ask you how did that happen? And why did you make happiness such a focus of that book?

So it's about a third of the book. I just went where the research took me. So the purpose of that book to help advisors be more successful in converting prospects into clients. And I got there through very basic neuroscience research. But when I was doing the research, I found that one of the things that contributes to success is happiness. In other words, happy people are more likely to be successful. Prior to that, I thought successful people were more likely to be happy. And so once I looked at that research and said, "No, happy people are more likely to be successful," I felt, "OK, if I'm writing a book trying to tell advisors how to be more successful, an important element of that is to show them how to be happier."

And this was almost an accident, wasn't it?

Yes, complete accident. Had never researched it before. I was stunned by what I found.

And I know you've been helping us for years so much so that we, as you know, named one of our meeting rooms after you. And you've coached us a lot about the power of asking questions. Was this the biggest epiphany you found in doing the research for your book?

That was one of them. But the biggest epiphany I found was neuroscience research, a Harvard study that said it's not just asking questions, because if you say to advisors, "Ask questions," their question will be, "What are your liquid assets?" What's your net worth? Those are questions. But what the research showed was when you empower people to talk about themselves, that the prefrontal cortex of their brain oxytocin flows into it, giving them an enormous feelings of pleasure, comparable to the most pleasurable events in their life. That was the epiphany. Then I just converted that to, okay, you want to create the best possible impression on someone else? Show a genuine interest in them and empower them to talk about themselves. Combination of asking questions and what kinds of questions to ask.

So interesting. And that has had a large impact on I believe your life, and also on our lives and how we communicate with the clients that we have, and in our personal relationships as well.

It's definitely ... That's very gratifying to hear, Ben. So thank you for saying that, but it has definitely had a major impact on my life, because as ... We could talk about this if you want to. As an introvert, there are many situations in which I used to feel acutely uncomfortable. They tend to be situations where there's a lot of stimulation, like many people in a room, a lot of noise. And when I figured out that all I really had to do was rather than entertain people and try to be charming and engaging, all I had to do is really just ask some questions, it reduced my stress level enormously. And it also had very positive impacts on my, as you point out, personal and business relationships. When you show a genuine interest in someone, the impact is really seismic and immediate.

You mentioned something that relates to one of the questions that I wanted to ask you. You were talking about how this way of interacting with people makes you feel. Now you're not the same as everybody else. Obviously everybody's different. I think that we often let the media define happiness or wellbeing, but wellbeing is different for every person. Can you talk a little bit about how an introvert and an extrovert might experience the world differently?

Yeah. That's a very insightful question actually. I think introverts and extroverts derive happiness from some common elements, but also from different perspectives. So for an introvert, we're very happy working alone, which is probably why I'm a writer at core. We don't need a lot of stimulation, and we're actually made quite unhappy by large networking events, for example. Extroverts thrive on those events. They charges the battery of an extrovert. So going to a New Year's Eve party, which would be very challenging for most introverts would be very enriching for most extroverts. So those are some of the differences, but there are some common areas as well.

There must also be, I'm only guessing here, Dan, but are there differences between men and women? I'm thinking for this to be effective for everyone's happiness, to engage with someone else you have to have a high level of empathy. How does empathy link to this area? And is it different for different genders?

So the data shows that women are more naturally inclined towards empathy than men. Now, obviously as with all generalizations, it doesn't mean all women are more empathetic than all men. But the theory, from what I gather, is that the cable that connects the two hemispheres in the brain, the right and the left is thicker with women. It's thinner with man. And the theory is that women, when they look at a particular situation, take in more emotional data points than men looking at the same situation. And that causes them to react in a more empathetic way. So as men, we have to try ... I find, I have to try harder than my wife does to be empathetic. So I'm always stopping my normal reaction and asking myself, "What's an empathetic response to that situation?" Empathy is really critical in life, business and social.

One of the other questions that I want to ask you, relating to empathy. Do you think that based on the differences in empathy between men and women, does it cause them to think about money or their investments in a different way?

I don't know that I've ever thought about that. Actually, my experience, which I'm interested to know if yours is the same, I don't think people think about money in a very rational way. For example, I know a lot of really wealthy people who are consumed with making more money. And when I was a wealth advisor, I would say to them, "So if you make another point or so, what will you do with the money?" And they could never answer that question. It's just kind of a game to them. So I think where advisors like you play such a critical role is helping people think intelligently about money, which is just a vehicle to achieve an end. An unhappy person with a lot of money has kind of lost the game of life, it seems to me. And you can help people prioritize appropriately, putting money in an appropriate perspective.

So many people I think are in a stereotypical relationship, often the first time we meet someone, there may be questions about performance or portfolio type questions, or questions that they think they should ask. The next level in my mind, and before that, it's more important, well how much should you save? Because often that matters more than how much you earn. Then take it up another level, which is, what will make you happy? So I've found that we've had many more happiness type questions, and that is so clarifying for someone to know what level of life will make them happy, and how much assets does it take to afford that and not just grow it for the sake of growing it.

So there's all this discussion in the trade press, as you know, about what's the value of the advisors? How do you quantify your value as an advisor? And there's a lot of talk about how the investing component has been kind of commoditized. So if you accept that the investing component is kind of commoditized, it's challenging for advisors to say, "Okay, well this is how I add value. What you just said is probably the best expression I've heard at least recently of how advisors genuinely add value. By getting people to think in a different way about what are we doing here, why are we here, what are we doing here, what role does money play in the overall plan? And better yet for most people, what is the plan? Because most people don't have one. They just get up every day and function, but they don't think about the big picture.

That's a great insight, Dan. And I think that one of our ... I believe it was one of our clients summed up the value of working with an advisor in a word. And they just said, "Perspective." We thought that was an interesting insight from client.

It's very interesting, but I think ... I often try to explain ... Advisors often ask me this question. Why are some advisors, like the two of you, so successful? What is it that makes you so much more successful than the vast majority of your peers? And I really do struggle with that. But here's what it comes down to. Being emotionally centered as people permits you to focus on other people intensely, and to put your own egos aside. I know that sounds a little simplistic, but I can't tell you how many advisors I meet who simply cannot put their own agenda and their own egos aside. Where what's really unique about the two of you, it's actually quite remarkable that the two of you even found each other, because you're very unique in your ability to focus intensely on your clients. And you don't feel at all slighted when they're not focusing on you, or when you're not establishing that you are the smartest people in the room, or that you're the most interesting people in the room.

Even though you probably are both of those, you're perfectly comfortable saying, "This is about you." And I think people generally react really positively to that, because it's so rare in our experience. I'll tell you a quick story. I ask every audience I talk to to give me an example, again it can be personal or business, when they said something really interesting to someone else, something they really thought was interesting, and when the other person stopped, looked at them and said, "Tell me more about that." And I've asked probably 1000 advisors, two people raised their hand and gave me examples. Two people. That's how rare it is. That's how rare I think the two of you are. And that's why I think you're so successful. You're two out of 1000.

Interesting. And also, thanks for that, Dan. So we've known you, I've known you for a while. Cameron's knowing you for a bit longer, but since we've known you you're always working on something. You've always got a project going. What are you working on right now?

I'm a big underdog person. And I don't mean to be a hypocrite. When I have my own law firm in New York, I represented Fortune 500 companies. I needed to make a living like everybody else. But in recent years when I could afford to do really what I wanted to do, I really like working on projects for people who can't get the kind of advice that the two of you dispense. And to me, in the states, that's middle-class America. So those are people who earn between, US dollars, 50 and $100,000 a year. And all the evidence is they're not going to be able to retire successfully. So I teamed up with a senior actuary at a major insurance firm to come up with a plan. We call it Middle America's Plan. The acronym is MAP. And we put together a website called ... It's middleamericasplan.com, and we're going to be posting shortly a plan for these people that will help them avoid the retirement tsunami that is clearly headed their way.

So this involves planning as well as asset management?

This involves advice on investing in as little exposure to the stock market as possible because they don't trust the market, and they're not comfortable in the market. So it's a combination of maximizing their social security benefits, investing in appropriate retirement plans because they got a match, and leveraging some little known insurance products that will give them a guaranteed stream of income, all with the goal of replacing at least 70% or more of their pre-retirement income so they can maintain their quality of life in retirement.

It's very gratifying, which is another kind of happiness, a little tidbit or nugget. In my life I have found I enjoy making money as much or more than the next person. So I don't mean to denigrate that activity at all. But I have found when I've done things with no economic benefit to me, the rewards are incrementally greater. So I try to devote a portion of my time to that activity. And I make it a larger and larger portion as opportunities arise.

But your whole career has been about that, right? About helping others while making you happy? It's like you've been on this epic journey of self fulfillment and happiness. Is that an overstatement?

I think I've struggled, like most people, with happiness. And I went through a lot of personal struggles of, "Why am I doing what I'm doing? Am I leaving any footprints in the sand? Why am I here?" I struggle with that for a long time. And it wasn't until I started writing books that I found real genuine happiness, because my books went out to so many people. Books touch people who ... The scale can be great. And then I started getting nice emails from people saying how my advice changed their life, and this did give me a lot of happiness.

So that statement that you just made, Dan, actually ties in perfectly to the last question that I wanted to ask you to wrap up. In all of your years helping people, as Cameron mentioned, you've been either in the courtroom or writing or helping evidence-based financial advisors connect with clients, but in all cases you've been helping people. Do you have any favorite stories from your career that you can share with us?

Well, there are a lot of stories. Let me come up with just a couple. I think to show you, I'm trying to proselytize how important it is to show a genuine interest in other people. And one of the ways you can tremendously impact the other people's feelings of self-worth is by showing that they are worthy of your undivided attention. So I've had many occasions, social occasions where I've spoken to people, asked them nice open-ended questions, they've responded with maybe an hour uninterrupted litany of issues relating to their life. And then I said nothing about myself and they asked nothing. And then they would write me and say to me what a wonderful conversation that was, and what an interesting person I am, even though they knew nothing about me. But it shows the impact you can have by following this basic neuroscience.

I've had some wins amongst the losses. When I was representing investors, I was successful in the minority of cases of getting money back that, that but for that intervention, those people would have been greeters at Walmart. So that's very rewarding. What I do currently is probably the most rewarding, because I speak to hundreds of advisors at a time, on a scale when they each take away what I've said and go out and do it, and then write may how it's affected them. I feel like I'm having more of an impact.