We Put Financial Advisers to the Test–and They Failed

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MachineGhost
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We Put Financial Advisers to the Test–and They Failed

Post by MachineGhost » Fri Oct 28, 2016 1:44 pm

In a study with my co-authors Sendhil Mullainathan at Harvard University and Markus Noeth at Hamburg University, we set out to analyze the quality of financial advice commonly given to clients. We sent “mystery shoppers” to financial advisers in the greater Boston area who impersonated regular customers seeking advice on how to invest their retirement savings outside of their 401(k) plans. The mystery shoppers also represent different levels of bias or misinformation about financial markets. What we learned is highly troubling.

By and large, the advice our shoppers received did not correct any of their misconceptions. Even more troubling, the advisers seemed to exaggerate the existing misconceptions of clients if it made it easier to sell more expensive and higher fee products.In addition, advisers strongly favored actively managed funds over index funds. In only 7.5% of sessions did advisers encourage investing in index funds.This is exactly counter to insights from finance research, which suggests that the average investor should choose low-cost index funds over actively managed funds. If advisers did happen to mention fees, they usually downplayed their importance.

Of course, no one expects financial advisers to work pro-bono. But what is alarming is that adviser incentives seem to be set in such a way as to move clients away from the existing strategy regardless of its merit, i.e., even when they looked at a low‐fee-diversified portfolio. As a result, we found that advisers appeared willing to make their clients worse off in order to secure financial gain for themselves. This is bad new for savers–including the many baby boomers–seeking to boost their retirement nest egg.

http://blogs.wsj.com/experts/2016/10/27 ... ey-failed/
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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