Seeking financial advice is bad for your wealth. New research by top academics concludes that the advisor industry mostly reinforces bad behavior, rather than fixing it, even when clients start with a well-diversified, low-fee portfolio. High fees and commissions incentivize advisors to promote performance chasing and costly actively-managed products.
They also found that advisor self‐interest plays an important role in generating recommendations that are not in the best interest of the clients. They are unwilling to lean against these biases even when they know they exist because not doing so helps them further their own economic interest, e.g. maximize fees and commissions.
In addition, in some cases the advice even pushes clients away from low-cost funds they may already own and toward funds and products that have higher fees, even though little is changed in portfolio diversification. This reduces the expected return on a portfolio by increasing cost.
Why are low-fee strategies stifled? Low-fee advisors have meager marketing budgets to promote rational investing. In contrast, Wall Street and the actively-managed mutual fund industry sink billions into advertising annually in order to capture the imagination of individual investors. It’s like David and Goliath, only Goliath never dies. Low-fee advisors survive and carry-on because we know that word of mouth is the most powerful marketing tool available.
I hope the mass media can find an incentive to report these facts. Sadly, that may prove difficult because their incentive is to collect advertising dollars, and that means highlighting poor advice more often than not. I’m usually not a pessimist, but in this case, I’ll make an exception.
