Study Suggests Investment Advisers Often Act in Their Own Interest
Many investment advisers reinforce client behaviors that are in the advisers’ best interest, and fail to discourage financial errors by investors.
These findings were reported in a working paper published by the National Bureau of Economic Research. The paper grew out of research at Harvard University, MIT and the University of Hamburg.
In the study, auditors went on 284 client visits in which they gathered information from advisers. The auditors presented one of four investment strategies:
- Chasing returns by attempting to beat the market via identifying industries that performed the best in the recent past;
- Allocating 30 percent of their portfolio into their employer’s stock;
- Having a well-diversified portfolio comprised of low-fee U.S. index stock and bond funds; and
- Holding all investable money in CDs, while having no preconceived investment biases.
Based on a review of the data, authors of the paper concluded that:
- The advisers displayed a significant bias toward actively managed funds, recommending them to the auditors 50 percent of the time. Advisers also encouraged trend-chasing and exaggerated biases that are in the advisers’ financial interest, while eschewing those that do not generate fees.
- While most advisers gave portfolio advice that was consisted with normally accepted practice, some advice reflected biases. Women were asked to hold a more conservative allocation, and advisers were more likely to mention fees to older auditors.
- Initially, advisers were supportive of the auditors’ current allocation. However, they unhesitantly encouraged the auditors to adopt a different investment strategy.
One takeaway from the study is that advisers may exaggerate investors’ existing biases and may even make clients worse off. This shows why it’s so important for you to ask questions and evaluate whether advice given is in your best interest.
The team of investment fraud lawyers at Starr Austen & Miller LLP fights for the protection of investors and handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence and breach of trust.
Source: The Market for Financial Advice: An Audit Study, Sendhil Mullainathan, Markus Noeth and Antoinette Schoar, National Bureau of Economic Research