The Misguided Beliefs of Financial Advisors

A common view of retail finance is that rampant conflicts of interest explain the high cost of financial advice. Using detailed data on financial advisors and their clients, however, we show that most advisors invest their personal portfolios just like they advise their clients. They trade frequently, chase returns, and prefer expensive, actively managed funds over cheap index funds. Differences in advisors’ beliefs affect not only their own investment choices, but also cause substantial variation in the quality and cost of their advice. Advisors do not hold expensive portfolios only to convince clients to do the same—their own performance would actually improve if they held exact copies of their clients’ portfolios, and they exhibit similar trading behavior even after they leave the industry. This evidence suggests that many advisors offer well-meaning, but misguided, recommendations rather than self-serving ones. Eliminating conflicts of interest may therefore reduce the cost of advice less than policymakers hope.