“The Misguided Beliefs of Financial Advisors”

A research piece published in April of this year looked at how financial advisers at two large Canadian firms invested both their clients’ money as well as their own. The data covered 4,000 financial advisors, 500,000 clients, and spanned 14 years. Its findings are frustrating, to say the least.

Here’s a summary, courtesy of Larry Swedroe:

  • “Advisors invest very similarly to their clients, trading frequently, chasing returns (buying funds with better than average recent returns), preferring expensive (average expense ratio of about 2.4%), actively managed funds, and under-diversifying (7-8% greater idiosyncratic risk than a market-like portfolio).
  • “An advisor’s own trading behavior strongly predicts the behavior common among his clients. For example, an advisor who encourages his clients to chase returns typically also chases returns himself.
  • “Although clients’ and advisors’ trades rarely deviate from each other, differences are systematic – when an advisor deviates from his clients, he favors funds with even stronger prior performance, higher expense ratios and more idiosyncratic risk. Advisors also trade more frequently than their clients.
  • “Advisors’ and their clients’ net alphas (performance versus passive benchmarks) were negative, averaging -3.1% for clients (t-stat = 3.4) and an even worse -3.7% (t-stat = 3.8) for advisors. The average advisor would earn higher returns if he copied his clients’ portfolios.
  • “Advisors who pay high fees underperform those who pay low fees, and so do their clients.
  • “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. Post-career advisors continue to favor actively managed funds and under-diversified portfolios, with allocations similar, but slightly more diversified, than they held while active. And nearly 90% of them continued to hold a personal portfolio at their old firm.”

It’s hard to know where to begin. I’ve long argued that, in general, financial advisors do a poor job investing on behalf of their clients because of an abundance of conflicts. It appears I was wrong, though the real reason is no less disheartening: the financial advisors in the study invest poorly because they don’t know the right way to invest. I find myself nodding soberly as the author notes “(M)any advisors recommend expensive portfolios because they are misguided rather than conflicted.” 

Misguided rather than conflicted.

I’ve mentioned before that we have spent a lot of time this year clarifying our mission, vision, and values. One of our four values is to Deliver Expert Advice, and we can only do this because we commit to:

  • Never stop learning;
  • Deliver our advice with confidence and humility;
  • Act in our client’s best interest. Period.

For example, despite 25 years of industry experience, Geoff Hall continues to learn and is currently studying for his Retirement Income Certified Planner™ designation. Jared Korver, already a CPA, recently earned his CERTIFIED FINANCIAL PLANNER™ designation. The newest member of our team, Ellen Martin, has her Certified Wealth Strategist® designation and will soon begin working towards her CFP®. I plan on starting the Certified Tax Specialist™ program next year. There’s always more to learn.

We also commit to delivering our advice with an open mind and a willingness to change our beliefs if proven wrong. If there’s a better way to do something, we want to know about it.

Finally, we act in our client’s best interest always and without qualification. It’s why, decades ago, Sam Bass organized Beacon Wealthcare to be fee-only, where our only compensation comes from our clients, and, as a Registered Investment Advisor, we are held to a fiduciary standard. These things matter.

I don’t write any of this to disparage any financial advisor. The study makes clear that we need to improve financial education for professionals, not just the average investor.

I do write this to say how grateful I am to be surrounded by the kind of people we have at Beacon Wealthcare. People who are curious, who continue to learn, who take their work seriously, have a deep passion for serving our clients, and operate with an open mind.

If you’re interested in learning more about what we do and how we can help, click here.

Ryan Smith
[email protected]

Born and raised on the North Shore of Massachusetts, I moved to Raleigh in 2011 to marry my wife, Emily. We have two kids, Jack and Gwen, a golden retriever named Olly, and are members of Church of the Apostles. I have been a Financial Advisor since 2005 and earned a Master’s of Science in Financial Planning from Bentley University in 2007. I became a CFP® professional in 2009, a Retirement Income Certified Professional® in 2015, and a Certified Tax Specialist™ in 2023.