This week I enjoyed reading a neat study from the National Bureau of Economic Research about the quality of retail investment advice. Researchers in the Boston area hired trained auditors to impersonate regular customers visiting retail advisors. Each auditor was given a (fake) portfolio and was told to ask the advisor for help with investing it.
The researchers summarize their findings:
“Advisers fail to de-bias their clients [Mike's note: That is, they fail to fix the glaring problems present in some of the fake portfolios.] and often reinforce biases that are in their [the advisor's] interests. Advisers encourage returns-chasing behavior and push for actively managed funds that have higher fees, even if the client starts with a well-diversified, low-fee portfolio.”
Frankly, I wasn’t surprised. High-cost, actively managed mutual funds are the bread and butter of most financial advisors you’d find at a bank or a local brokerage firm.
What did surprise me was this finding: ”In this audit study, auditors were willing to go back to about 70% of the advisers they visited but now with their own money.” In other words, the advisors gave advice that tended to put their own interests ahead of their clients, yet the auditors themselves were generally convinced that the advice was of high quality. That’s a problem.
If you don’t want to spend the $5 to get access to the study, I’d encourage you to read Steve Vernon’s write-up at CBS News: Retail Financial Advisors Looking Out for Themselves?
Investing Articles
- Why a Short ETF Won’t Protect You in a Bear Market from Monevator
- Resolving a Dispute with Your Brokerage Firm from Consumerism Commentary
- How Much is Too Much in a Single Investment? from Darrow Kirkpatrick
- Sitting Out the Roth IRA Movement Party from The Finance Buff
- Why You Should Be Wary of Dividend Stock Strategies from Larry Swedroe
Other Money-Related Articles
- Pay Yourself First: What it Means and How to Do It from WiseBread
- Side-Hustle Series: I’m a Bouncer from Budgets Are Sexy
