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.