A recent research paper out of Germany provides ammunition to those who question the value of investment advice. The paper titled “Financial Advisors: A Case of Babysitters?” analyzed two sets of data: 32,751 randomly selected internet brokerage accounts over a 66 month period and 10,434 randomly selected clients of a bank covering a 34-month period. A portion of clients both at the internet broker and the bank optionally worked with an advisor. The researchers analyzed the performance records of independent advisors from the first set and that of bank financial advisors from the second set to answer questions like whether advisors tend to be matched with poorer, uninformed investors or with richer, experienced ones and how advised accounts perform relative to non-advised ones.

The researchers found that advisors are more likely to make successful matches with older, more experienced, single, female investors rather than younger, inexperienced investors. They also found that advised clients get lower net returns and lower risk-adjusted net returns than they could have achieved on their own. In other words, on average the cost of financial advice exceeded the benefits that advisors can provide. And consistent with the incentive structure of advisors, the researchers found that advised accounts trade more and have higher turnover.

Since advisors are matched with richer, older and more experienced investors, the researchers liken them to babysitters:

In this respect, advisors are similar to babysitters: babysitters are matched with well-to-do households, they perform a service that parents themselves could do better, they charge for it, but observed child achievement is often better than what people without babysitters obtain, because other contributing factors are favorable.

The research paper is available here. A tip of the hat to Ken Kivenko of CanadianFundWatch.com for pointing to the research.

This article has 18 comments

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  2. The results aren’t too surprising, but it’s important to verify these things. The best part is the reference to babysitters — that cracked me up.

  3. @Michael: I skimmed through the paper but it seemed to me that the study was structured well. i.e. Large amounts of data with substantial numbers in both advised and non-advised clients. The results are also over a reasonably long time frame: 5-1/2 years. It does seem to be a very rigorous study.

    Having said that, I admit to a pre-conceived bias. I’ve always felt that investment advice, on average, probably cannot overcome the fees charged. I’m open to studies that show the bias to be false but I haven’t seen any.

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  5. Thanks Larry. I must have missed that post. So, it’s not just one study. All of these demonstrate that, on average, investment advice isn’t worth the fees deducted.

  6. Advisors are like investment blogs…

    Most aren’t that good, but a few are great. The great ones are well worth it.

    The trick is determining how to weed out the crappy ones.

    • @Rob: Ha. Ha. That is true. One point worth making is that these studies measure the impact of *investment* advice. A financial advisor could add value in other ways but that doesn’t show up here. For instance, let’s say an advisor looks over a DIY account and finds assets held in wrong locations. Say bonds / GICs in taxable accounts. The advisor shuffles these over to tax deferred accounts. This move could save a bundle in taxes but the impact on *investment* returns as measured by a study such as this will be nil.

      I definitely buy the claim that a *good* advisor can add value to most investment accounts. Finding one though isn’t easy. And an average advisor doesn’t seem to do much good at all.

  7. Weeding out the crappy is definitely the required skill. Not easy, I agree.

  8. Moving from one advisor to an other,is like pulling your hair out…..at this point an time, i should have stayed DIY

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  11. A Financial Advisor

    And this is why 70,000 canadians ended up over contributing to their TFSA and now have to pay penalties to the CRA. Because the Financial advisor does not add value, and I’ll be better off doing it myself, and in the process pay more in taxes, tax penalties, books and subscriptions to the “smart” investment “experts” who “incidentally” keep publishing how useless a financial advisor is.

  12. To Financial Advisor: If you are stupid enough to overcontribute to a TFSA, then you probably do need a financial advisor; otherwise, with just reasonable effort, you can easily learn enough to manage your own finances and investments. It isn’t rocket science. Also, by the time you have learned enough to avoid falling prey to the bad, and merely incompetent financial advisors, you know enough to manage your own affairs.

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