The Misguided Beliefs of Financial Advisors

Below is the abstract from this paper – The Misguided Beliefs of Financial Advisors

A common view of retail finance is that conflicts of interest contribute to the high cost of advice. Using detailed data on financial advisors and their clients, however, we show that most advisors invest their personal portfolios just like they advise their clients. They trade frequently, prefer expensive, actively managed funds, chase returns, and under-diversify. Differences in advisors’ beliefs affect not only their own investment choices, but also cause substantial variation in the quality and cost of their advice. Advisors do not hold expensive portfolios only to convince clients to do the same—their own performance would actually improve if they held exact copies of their clients’ portfolios, and they trade similarly even after they leave the industry. These results suggest that many advisors offer well-meaning, but misguided, recommendations rather than self-serving ones. Policies aimed at resolving conflicts of interest between advisors and clients do not address this problem.

This paper is interesting because it posits a parallel explanation as to why the advice that individuals receive from financial planners is so poor. Traditionally it is thought that poor advice stems simply from a conflict of interest. Planners put their own financial interests ahead of the clients and recommend high fee rubbish. As the paper mentions measures are now being put in place in various domains to prevent this from happening – a move the financial planning industry has resisted with profound vigour. My reading of the paper is a somewhat cynical interpretation of this sentence from the abstract –

These results suggest that many advisors offer well-meaning, but misguided, recommendations rather than self-serving ones (See Dunning -Kruger, authors addition)

My interpretation of this is that financial planners as a population are simply stupid and unaware of the intricacies of either providing accurate, timely and relevant advice to clients and therefore they provide themselves with the same stupid advice. It is probably somewhat unreasonable to expect someone who gives themselves rubbish advice to demonstrate a schism between what they tell a client and what they tell themselves. The way you do one thing is the way you do everything.