Originally published on Advisor Perspectives, October 23, 2017

When I was a wealth advisor, the most difficult situation I confronted was one where the prospect believed in active management.  Once we engaged in the active/passive debate, it was unlikely either of us could convince the other.  I can’t think of a single instance where I was able to convince a prospect that passive investing was a superior choice.  My colleagues – and my coaching clients – report similar experiences.

The wrong approach

It turns out my protocol for dealing with these situations was the opposite of what science indicates I should have been doing.  Relying on my legal training, I marshaled the evidence in favor of passive investing and inundated the prospect with compelling (or so I thought) peer-reviewed articles supporting my investment philosophy.  It was enormously frustrating when the response was often non-scientific and anecdotal, like, I still believe my broker and I can beat the market – and we have done so.

I tried everything, to no avail.

I would give the prospect copies of studies from prestigious journals and books summarizing these studies.  I would reference quotes from Nobel Laureates supporting my view.  Sometimes, I would be so frustrated, I would say something like, I’ve shown you my data.  Where is yours?

Nothing worked.  I wish I knew then what I’m about to relate to you.

A better way

In her fascinating book, The Influential Mind, What the Brain Reveals about Our Power to Change Others, neuroscientist Tali Sharot explained why marshaling data in support of your point of view is actually counter-productive. She explained that, when we do so, the other person doesn’t objectively consider the merit of your facts. Instead, they use those facts to support their pre-existing belief or “turn away” and don’t consider them at all.

My experience validated this reaction.  If I showed data indicating the small likelihood of an actively managed portfolio outperforming a passively managed one – especially after taxes and over longer periods of time – the response was almost always along these lines:  "I understand but you’ve indicated that some people beat these odds and I don’t understand why you assume that I won’t be one of those people."

Not only did my facts fail to persuade, they polarized the prospect and me even more than before I conveyed them.

Sharot proposes an entirely different approach, which she summarizes as follows:  When an established belief is difficult to weed out, seeding a new one may be the answer.

The dynamic I was using was a prescription for failure. I was telling the prospect that I was right and he or she was wrong. What if I had said something along these lines:

There are benefits to both active and passive management. With active management, there’s a possibility you’ll beat the market and earn higher returns. With passive management, there’s a certainty you will capture the returns of the market (net of low fees), and those returns have historically exceeded the returns of most professional money managers. Is the certainty of knowing you will earn those returns more valuable to you than the possibility of earning even higher returns?

With this response, I’ve avoided the “right versus wrong” scenario. Instead, I’ve acknowledged the benefit of both active and passive management and left it to the prospect to determine which the most suitable choice is.

Try this approach and let me know how it works for you.