The Danger of Unexamined Assumptions

Unconventional Wisdom for Financial Advisors

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It’s been over a decade since I first started thinking about my financial planning career as a potential ministry. But only more recently have I really sought – and struggled – to reconcile the words of scripture pertaining to money with the prevailing wisdom of the financial industry.

I could sum up the crux of the challenge in two words: unexamined assumptions.  We all have beliefs about the way the world works and the way any particular industry works.  These are more often “caught” than taught; the types of things we learn through observation and unspoken rules.

We tend to do things a certain way because that’s how it’s always been done.  I’m referring to the conventional wisdom of a profession – beliefs that are so ingrained and widespread they are simply accepted as fact.  The problem is it’s exactly the things that “everyone knows to be true” that result in followers of Jesus doing business in substantively the same way as everyone else.  These are the underlying beliefs that prevent Christians from being salt and light at work.  

The Purpose of Business

In the financial industry, there are many statements of conventional wisdom that are at odds with scripture.  One such belief is that the purpose of business is to maximize profitability.         

Decades ago, Milton Friedman – along with many other influential economists – contended that business managers have a moral obligation to do everything within their power to maximize shareholder value.  Since then, the conventional wisdom has coalesced around the idea that the primary purpose of business is to maximize profits.  

Does the creation account in Genesis support this claim?  Well, certainly there is a case to be made that business is designed to create value, enable prosperity, and even create wealth (Deuteronomy 8:17-18).  When God commanded in Genesis 1:28 that we are to work the fields and cause the land to be “fruitful” and “fill the earth,” we might well characterize this as wealth creation.  But the question really is one of purpose versus results.  Profits are crucial to a business achieving its goals, but it is not its primary purpose.  

Just as we need to eat to survive, businesses need profits to survive. However, it does not follow that businesses then exist in order to maximize profits.  By that logic, nonprofit organizations exist to raise funds.  After all, many nonprofit workers would say that is where they spend most of their time.  And yet, no one is really confused about that when it comes to nonprofits.  We all understand that, while fundraising is crucial to their survival, nonprofits exist in order to serve those in need.  

In business, organizations lose much of their intrinsic worth and meaning if the products and services they provide are viewed merely as a means to an end.  It can cause companies to lose focus on what truly matters (i.e., serving the needs of customers, creating great products, etc.) and concentrate on very short term results.

If profit is understood to be an end in and of itself, then being truthful and straightforward with customers becomes expendable.  Providing meaningful work to employees is optional.  These goals are only prioritized to the extent that they help the bottom line.

That is clearly at odds with the Biblical vision for business.  There is a reason why the Apostle Paul includes “swindling” among a select list of other sins such as sexual immorality, idolatry, and drunkenness.  The word swindling referred to a ruthless business practice, but not an illegal one.  And yet, Paul is intentional in making it clear that it is characteristic of “wrongdoers who will not inherit the kingdom of God” (1 Corinthians 5-6).   

According to Jeff Van Duzer’s excellent book, Why Business Matters to God, the primary purpose of business is twofold:   1) to provide the community with goods and services that enable it to flourish and 2) to provide opportunities for meaningful work that enable people to utilize their God-given abilities.  The first is external; the second is internal.  

Investing Implications

These assumptions about the nature of business have major implications for an advisor’s investment philosophy.  If you subscribe to the belief that business exists in order to make money, then you are not likely to utilize any values-oriented screens for the companies you invest in.  

Values-based investing is probably not going to resonate with you if you believe that the primary goal of the companies you invest in – either through individual securities or mutual funds – is just to make as much money as possible.  If anything, socially responsible or morally responsible investing is a distraction in order to accommodate more “touchy-feely” concerns or appease clients who insist on doing it.

If, on the other hand, you believe that businesses exist primarily to serve their clients and enable employees to capitalize on their strengths in doing meaningful work, then the concept of values-based investing will, intuitively, make more sense to you.  You may even consider the values of a company you are potentially going to invest in to be a “leading indicator” of sorts by reducing the chances of reputational risk and chasing bad profits.

Just a Nice Theory?  

There is a growing body of empirical evidence to support the notion that many of the best companies in the world are ones that put purpose before profit.  In Built to Last, Jim Collins and Jerry Poras showed that organizations driven by purpose and values outperformed the general market 15:1.

Mercer Research reviewed 36 different studies on this topic and found that more than half of them (55.6%) showed a definitively positive relationship between performance and values-based investment screens.  Less than 10% of those studies showed a clear negative correlation between values-based investment screens and performance.

A Morgan Stanley report from 2015 concluded that “investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments.”  The research included the performance of 10,228 U.S. mutual funds over seven years.  The results showed that returns of “sustainable funds” (a term used for various types of funds using social, environmental, and values-based screening criteria) were equal to or higher than traditional funds 64% of the time.  In addition, it found that the sustainable funds averaged lower levels of volatility than the traditional funds.

If the conventional wisdom says that the purpose of business is to maximize profits.  The unconventional wisdom is that businesses ultimately exist to serve.  Those that serve clients (and various other stakeholders) exceptionally well will be the most profitable over the long term.    

 

Chad Hamilton is a Certified Financial Planner and a Chartered Advisor in Philanthropy.  He is the author of the books Redefining Financial Freedom and Deep Wealth.  Chad lives in Denver, Colorado, with his wife and three children.