Financial advisors are all familiar with Dalbar. Indeed, a good many of their clients are also familiar with its ubiquitous name, usually in connection with annually or quarterly updated studies and ratings reported in the financial press.
But who exactly is this Mr. Dalbar we’ve been hearing about for decades?
The wizard behind the curtain is Lou Harvey, who has led the Boston-based market research firm since he founded it in 1976.
Harvey has kept Dalbar on the cutting edge of some key issues in financial services. For example, he helped popularize behavioral finance long before it was in vogue, with the firm’s Quantitative Analysis of Investor Behavior” (QAIB) report, now in its 21st edition.
QAIB brought to investor consciousness the distinction between investment returns and investor returns. Its most recent April update showed that stock mutual fund investors trailed the S&P 500 by over 8%.
The annual inference (each year brings similarly dismal results) is that the behavioral foibles of fund investors such as chasing returns by switching in and out of funds takes a big toll on financial outcomes. Vanguard founder Jack Bogle has often cited QAIB statistics in pressing his case for indexing.
Today, Harvey is particularly involved in training advisors toward fiduciary certification—as a means of maintaining a regulator-proof business model, but also in order to offer clients a superior standard of care.
The Dalbar imprimatur coveted by financial services companies through the firm’s various product and service evaluations would have been inconceivable to a much younger Harvey, who knew nothing about finance in his youth.
Born on Guatemala’s Caribbean coast and then raised in his mother’s native Jamaica from the age of nine through college, where he studied physics, the young Harvey was 20 when he set out for the excitement of New York.
“I didn’t like Jamaica at all,” Harvey recalled. But his scientific, technical and computer training—the young Harvey was part of a group that installed the University of the West Indies’ first computer—opened doors in the early ’60s U.S. where computer skill was scant but very much in demand.
Less than three months in the Big Apple, the young professional received a financial services marketing pitch to discuss his “financial future” in the mail.
After responding eagerly, a broker met with him to explain the stock market, diversification and risk management—(to him) completely new concepts that he found “awe inspiring.”
“A month or two” later, Harvey was a registered rep offering mutual funds himself. The newly minted broker rose quickly in a variety of jobs over the next three or four years, one of which took him to Boston, his home ever since.
Harvey followed the then current corporate fashion—sans the millions of dollars of consulting fees—of coming up with a name that conveys a sense of strength and authority.
“We can do this for cheap,” he jokingly recalled of the brainstorming session that led to the name Dalbar. “It doesn’t mean any more than Exxon means something.”
But what does mean something to Harvey is Dalbar’s mission, which remains as valid today as it did at the firm’s inception four decades ago: that, as he put it, “by doing things right, we can in fact generate opportunities and profits.”
Among his biggest current preoccupations is Dalbar’s involvement in the fiduciary movement, albeit with a distinctly different spin from that of other fiduciary advocates:
“As the industry organizes itself, the solution is to act in the client’s best interest […]. That’s really the only sustainable path,” he said in his dulcet Caribbean accent.
But to him, though not to many others, part of the fiduciary mission means “rais[ing] awareness of the folly of trying to mandate standards of quality.”
“It seems patently obvious,” he explained, “that simply changing the label that somebody wears isn’t going to change their character. If I’m acting in my client’s best interest […], I’m going to continue to do that regardless of [my registration].
“But if I’m going to find every shortcut I can find to beat my client out of money, whether you call me a fiduciary or a thief, I’m still going to do that. There are things that are not mandatable. If I decided to call every single person out there an honest man, does that make them all honest?”
Besides his efforts to get advisors to operate at a higher standard, Harvey’s other goals include teaching advisors how to mitigate growing regulatory risks while showing them how to do business without being dependent on product manufacturers.
“I think we can show them how they can profit from a more aligned compensation system,” the fiduciary advocate said.