The Misguided Beliefs of Financial Advisors

[REWahoo]

A recent study reveals some very interesting reasons [many, not all] financial advisors perform so poorly for their clients. It isn't due to conflict of interest, they evidently believe in their strategy - because they invest their own money the same way, even after leaving the industry!

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 personally just as they advise their clients. Advisors trade frequently, chase returns, prefer expensive, 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.

https://poseidon01.ssrn.com/deliver...8109027016105071124105088106120078111&EXT=pdf

 

[Chuckanut]

Cognitive Dissonance may be at work here.

It occurs when people know that A is right and B is wrong. But, they want to do B very much. Thus they must struggle to justify doing B instead of A.

First they feel bad about doing B. Then they convince themselves that B is OK since nobody is actually getting hurt very badly. After all, the customer is still making money. Eventually they convince themselves that B is actually the right thing to do. And doing A is actually wrong.

They must do this or the Cognitive Dissonance drives them nuts.

 

[OldShooter]

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

― Upton Sinclair

 

[jzajzz]

know plenty of advisors who believe in passive portfolios .. .so they can just sit there and collect 1% .. while running a "lifestyle business" .. there are money to be made in whatever strategy you chose.