Although not news to me – you might find it shocking and certainly disturbing to discover that some financial advisors will sometimes work against their clients best interests if – guess what? If the advisor can pocket more money in fees.
According to a new study, done by Cambridge Mass. based National Bureau of Economic Research, (NBER) many advisors will encourage chasing high returns and press clients toward funds with higher fees. This was discovered after NBER sent out auditors, posing as clients, to almost 300 financial advisors in the Boston area.
Those 300 chosen advisors were ones which your average Joe might choose. They were found at banks, independent brokerage and independent investment advisory firms. They were not fee-only financial advisors, but were paid through fees generated rather than assets under management or portfolio performance. The fake clients showed investments between $45 - $105,000, and sadly, the advisors tended either not to mention fees or downplay them when asked outright.
And if you think this is an isolated problem – think again. It happens everywhere and financial advisors are thinking and acting like salespeople more than ever before. Greed has gotten a strong hold on them.
The fake clients shared various portfolios with the advisors and then asked for investment advice. Sensing a sales opportunity, the advisor complimented the portfolio choices, but in 50% of the cases, attempted to change them toward actively managed funds – which have higher fees. Just 7.5% of the advisors suggested my favorite type of investments, index funds.
The advisors recommended investing in stocks more as the fake client’s income increased, assuming a higher net worth client could afford more risk. Advisors, shockingly, did not consider the age of the client when choosing the mix of stocks and bonds.
In effect, the advisors were gearing these new potential ‘clients’ toward an investment portfolio that was going to place the client in a more vulnerable position. By charging higher fees, the client was now going to be in worse shape with the ‘new strategy’ introduced by the advisor.
You can clearly see who the winner is in this scenario.
The study was based on the idea that investors are bad at choosing portfolios when left to their own devices, but input from financial advisors can influence and sway their decisions greatly. The findings also reveal that a financial advisors self interest overrides the clients best interest.
So when choosing a financial advisor for your investment portfolio – remember one thing: a fee-only financial advisor is the only way to go.