Financial advisors often work against their clients’ best interests if it means earning more in commissions, according to a recent study by the National Bureau of Economic Research (NBER). Specifically, “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,” according to the study.
The NBER reached these conclusions after its auditors, pretending to be clients, made 284 visits to financial advisors in the Boston and Cambridge areas. The advisors audited in the study were those an average citizen would have access to through a bank, independent brokerage or investment advisory firm.
Here’s the key: The advisors audited were usually paid through commissions generated through product sales rather than fees for asset under management. Consequently, the advisors in the study tended to move shoppers away from existing strategy, regardless of the initial portfolio, that is, even when they looked at a low-fee, diversified portfolio.
Surprisingly, the study also found that advisors tend to not even tailor the mix of stocks and bonds to the age of the client.
The study concluded “that advisors’ self-interest plays an important role in providing advice that is not in the best interests of their clients.” This is further evidence that most investors would benefit from working with a fee-only financial planner, as fee-only planners never collect commissions from the products they recommend. Simply, fee-only advisors are paid a fee by the client to represent their best interest, rather than a commission by a product in order to promote the investment whether or not it is a good fit for the investor. Thus, a fee-only advisor is financially motivated to always act in their clients’ best interest.