Thursday, 24 September 2009

Reasearch Results on Whether Financial Advisors Help or Hinder

Sadly, the answer is that financial advisors hinder according to Do financial advisors improve portfolio performance?, a just-released study of German investors at Vox by university professors Andreas Hackethal, Michalis Haliassos and Tullio Jappelli. The reason is the old bugaboo - costs and fees.

Advisors add value but ... "Even if advisors add value to the account, they collect more in fees and commissions than they contribute." Apparently the authors found that richer, older people tend to use advisors more which accounts for a preliminary gross conclusion that "Investors who delegate portfolio management to a financial advisor achieve on average greater returns, lower risk, lower probabilities of losses and of substantial losses, and greater diversification through investments in mutual funds." They note that the financial industry would love to grab that statement for publicity. However, the net truth is completely opposite: "Once we control for different characteristics of investors using financial advisors, we discover that advisors actually tend to lower returns, raise portfolio risk, increase the probabilities of losses, and increase trading frequency and portfolio turnover relative to what account owners of given characteristics tend to achieve on their own."

Of course, that does not mean that all advisors are bad for your financial health. It does mean choosing carefully, however.

So, DIY investors, take heart. Follow sound investing practices and you too will succeed.

3 comments:

zcott said...

The one thing this analysis leaves out is the time, angst, and lost opportunity cost (in their own careers) for investors who manage their own stuff.

CanadianInvestor said...

You are right, zcott, I cannot presume that everyone is like me in thinking of it as a fun intellectual hobby.

That said, the investment side can be very easy: some of the ultra simple passive portfolios can do pretty darn close to the best possible - e.g. the Claymore or iShares Canada Portfolio ETFs - CBN and XGR respectively. See this post I did - http://canadianfinancialdiy.blogspot.com/2008/12/comparison-of-canadian-growth-portfolio.html

The financial planning side of identifying goals, budgeting, savings rates, tax planning that so many so-called advisors do not do, is more complicated. I think there's a lot more usefulness for GOOD advisors there.

The Rat said...

Not everyone can take ownership of their financial work and crack open a non-registered investment account and go it on their own.

I have seen professionals with business degrees who are 100% into mutual funds (outside RRSPs) and rely exclusively on financial advisors for direction.

I think financial advisors play an important role, but for the people whom are truly interested as to where their money is going, or hobbyists as CanadianIvestor said, it is a totally different story.

I cringe at the possibility of having to pay MERs that automatically mean what could have been a 7% return turns into a 4 to 5% because of management fees!

Cheers

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