How do you know if your advisory firm has chosen the right planning software or onboarding technology? Or, in the case of breakaway brokers, the right firm to join?
You probably won’t know the answer for some time and may never know whether the decision made was the best choice, but there is a way to increase the odds of choosing well and avoiding an absolutely disastrous decision.
“Consider the opposite,” advises Daylian Cain, Ph.D and senior lecturer at the Yale School of Management, who spoke at the Investments & Wealth Institute’s recent Investment Advisor Forum in New York.
Rather than ask your team whether a decision is right, consider whether it is wrong. “Invite criticism and hostility for your ideas,” said Cain. Create a “red team” that weighs in on big decisions, using different people each time, before decisions are made, and “honor” their work, which should itemize in writing several reasons why a decision is wrong. Red-teaming a decision provides the confidence to defend it, according to Cain, who warned, “don’t focus on reasons to do something unless you’ve already predisposed against it.”
Before such an exercise, firms first need to create an environment where team members feel safe criticizing the ideas of their superiors. ”Criticism is socially awkward,” said Cain. “The key to red-teaming is making criticism comfortable.”
It’s also important to ask the right question in the first place. Cain told the story of eating at a new restaurant in New Haven with a colleague. They didn’t like the food, but when the owner asked if the food was OK, they felt awkward responding honestly. The owner should have asked instead for one way he could improve the restaurant, said Cain.
There are also decisions that can’t be red-teamed because there isn’t a good case to be made for opposing them. In those cases, Cain suggested, teams should set tripwires to test whether a decision is a good one. Before a merger, for example, set goals and a timeline to achieve them, then test at regular intervals whether the merger is on track to meet them, adding what-ifs along the way, like a major market or economic decline.
He recalled a conversation with an M&A expert who said he asks his team why this merger makes sense and what synergies and growth rates can be expected within a certain period of time. Then every few months they revisit the actual growth achieved, testing it against the original goals and against potential changes in the market and/or economy, lowering the expectations.
“The red team becomes the canary in the coal mine,” he says.
For investment forecasts, Cain suggested looking for evidence of what could go wrong. And for regulatory expectations, like the Labor Department fiduciary rule, he recommended against spending too much time talking and thinking about what the future will bring because that will always be uncertain.
“Spend a little time doing that in service of having more time to plan for all potential regulatory futures. If there are five potential regulatory futures, instead of predicting one, plan for five. “
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