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Applying Legal Skills to Financial Advising

September 24, 2013

Advisors who can think like lawyers may be in a better position to take care of clients, says a recent post in the Above the Market blog by an attorney-turned-FA.

Recognizing that absolute certainty can be difficult if not impossible to achieve is a good place to start. Legal cases are won not on truth but on the most probable case, says the blog — even if that comes down to a 50.1% likelihood that one side’s argument makes more sense than the other’s. Predicting financial markets is as uncertain a realm as it gets. So it stands to reason that advisors who grasp probability will make sounder judgments for their clients.

Above the Market claims that since strong arguments depend on seeing the other guy’s point of view, strong lawyers privately try to make their opponents’ cases. The exercise forces them to fill in the gaps in their own logic. Similarly, all investors — including advisors — are susceptible to behavioral biases (for example, confirmation bias and optimism bias). Advisors who attack their own claims as a way of looking in the mirror stand to make wiser decisions on behalf of their clients.

Evidence makes or breaks the case, according to the blog. In a court of law a judge decides what so-called evidence is admissible, ideally based on the substance it contributes to the argument. Then lawyers apply meaning to that evidence and dress it up with stylistic flourish. Financial advisors can emulate the style and substance of legal evidence by hunting for hard data and presenting it “within an analytical framework that makes sense,” says the blog. Developing such skills may help advisors persuade clients to go along with their suggestions.

After casework is done, it needs to be checked multiple times, sometimes by outside lawyers. Above the Market argues that investment decisions require similar backup and objectivity. That’s where “empowered teams” and “skeptical colleagues” can save the day, according to the blog. One inference could be that solitary advisors face an uphill battle against investment errors. Another could be that collaboration among advisors at a firm is the best thing that can happen to their clients.

By Chris Latham
  • To read the Above the Market article cited in this story, click here.