Financial advice for private investors has been criticized to be costly or of low quality. A central concern, highlighted in academic studies and policy debates alike, is that advisors lack a fiduciary obligation to clients and receive commissions that may create agency conflicts.
However, using detailed data on financial advisors and their clients, this paper1 shows that most advisors invest personally just as they advise their clients. Advisors trade frequently, chase returns, prefer expensive mutual 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, as they continue to do so after they leave the industry.
A policy implication of these findings is that improved education or better screening of advisors is more needed than regulation designed to align their interest with their clients.
1Linnainmaa, Melzer & Previtero, “The Misguided Beliefs of Financial Advisors”, SSRN working paper, no. 3101426, 2017.
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