The Misguided Beliefs of Financial Advisors

Abstract

A common view of retail finance is that conflicts of interest contribute to the high cost of advice. Within a large sample of Canadian financial advisors and their clients, however, we show that advisors typically invest personally just as they advise their clients. Advisors trade frequently, chase returns, prefer expensive and actively managed funds, and underdiversify. Advisors' net returns of −3% per year are similar to their clients' net returns. Advisors do not strategically hold expensive portfolios only to convince clients to do the same; they continue to do so after they leave the industry.

Cognitive Skills and Economic Preferences in the Fund Industry

“…This observation is in line with the experimental nding of Kirchler et al (2018a), showing that nancial professionals' selfassessed risk attitude predominantly explains risk-taking on behalf of third parties (customers). Our nding relate to the empirical observations of Foerster et al (2017) and Linnainmaa et al (2019). Both studies show that advisor xed eects explain considerably more variation in household portfolio risk than a broad set of investor attributes and that most nancial advisors invest their personal portfolios just like they advise their clients-i.e., they trade too much, chase returns, prefer expensive, actively managed funds, and hold underdiversied portfolios.…”

Delegation Decisions in Finance

“…Moreover, in their empirical study, Foerster et al (2017) report that adviser xed e ects explain considerably more variation in household portfolio risk than a broad set of investor attributes. Linnainmaa et al (2019) show that most advisers invest their personal portfolios just as they advise their clients. We contribute by pointing at the problem of communicating risk-levels between principals and agents, resulting in considerable overlaps of portfolio risk across clients' demanded risk classes.…”

Innowacje finansowe w gospodarce 4.0

“…Doradcy popełniają te same błędy na własnych rachunkach inwestycyjnych, co na rachunkach swoich klientów, a tym samym przekazują klientom własne uprzedzenia. Dokonują częstego obrotu instrumentami finansowymi, "gonią" za stopami zwrotu, preferują drogie i aktywnie zarządzane fundusze i nie dywersyfikują portfela inwestycyjnego (Linnainmaa, Melzer i Previtero, 2021). Zatem ich nieracjonalne zachowanie jest dla inwestorów nie tylko nieefektywne, ale i drogie (Hackethal, Haliassos i Jappelli, 2012).…”