“The Misguided Beliefs of Financial Advisors”, a recently released study of two “anonymous” Canadian mutual fund dealers (over 4000 advisors, half a million clients) finds Canadian advisors recommend investments that underperform the market by 3% annually. No news here.

The shocking revelation (to me at least) is that advisors personally invest the same way and suffer the same miserable results! These “misguided” investment advisors appear to be earnestly recommending a course of action which they themselves follow and believe to be beneficial but which, in practice, will cause serious damage.

This suggests two conclusions:

1. Advice offered by Canadian mutual fund sales people leads to severe underperformance
2. While conflicts of interest likely contribute to bad advice, advisor ignorance is also a major factor

Here are a couple of quotes drawn from this remarkable study:

“A common view of retail finance is that conflicts of interest contribute to the high cost of advice. Using detailed data on financial advisors and their clients, however, we show that most advisors invest personally just as they advise their clients. Advisors trade frequently, chase returns, prefer expensive, actively managed funds, and under diversify.”

“Advisory firms may [hire] precisely those advisors who will deliver sincere, but expensive, advice.”

“Advisors’ net returns of minus 3% per year [compared to index returns] are similar to their clients’ net returns.”

Who are these two Canadian financial institutions? Are they taking remedial action to educate their 4,000 advisors?

*December 2017 by Juhani T. Linnainmaa, Brian T. Melzer and Alessandro Previtero