Most Commission-Based Advisors Caught Failing Clients in Research Sting

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Can you trust your financial advisor?

Can you trust your financial advisor?

Most people are surprised that my answer is “No”. In fact you have no legal right to trust a so-called financial advisor who is not a fee-only fiduciary. Now there is a study that confirms it.

The National Bureau of Economic Research recently sponsored a study by Harvard economist Sendhil Mullainathan, Markus Noeth of the University of Hamburg and Antoinette Schoar of the MIT Sloan School of Management. Here is a section of an AdvisorOne article by John Sullivan:

Do financial advisors undo or reinforce the behavioral biases and misconceptions of their clients? It’s a question that receives no shortage of attention in an industry that wrestles with behavioral economics, a fiduciary standard and an overall effort to do right by clients. And it’s a question most recently asked by three top economists in an undercover audit of Boston-area financial advisors.

You won’t like the answer.

“We document that advisors fail to ‘de-bias’ their clients and often reinforce biases that are in their interests,” the authors found. “Advisors encourage returns-chasing behavior and push for actively managed funds that have higher fees, even if the client starts with a well-diversified, low-fee portfolio.” …

Most advisors in the study are paid on commission based on the fees and volumes that they generate. …

The study found advisors’ reactions to different portfolios or investment scenarios varied significantly. They were broadly supportive of the trend‐chasing portfolio but much less supportive of the company stock portfolio. Most strikingly, according to the authors, advisors were “unsupportive of the index portfolio and suggested a change to actively managed funds. Overall, advisors had a significant bias towards active management.”

“In nearly 50% of the visits, the advisor encouraged investing in an actively managed fund; by contrast, in only 7.5% of the advice sessions (21 visits), advisors encouraged investing in an index fund.”

When advisors mentioned fees, they did so in a way that “downplayed them without lying.”

You need an advisor who sits on your side of the table and has your best interests at heart.

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President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.