When Advisors Underperform, So Do Clients
Clients invest similarly to their advisors, which leads to correlation in their investment performance.
We sort advisors into deciles based on their personal investment returns. Clients of bottom-decile advisors underperform those of top-decile advisors by 1.61% per year.
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 underdiversify. Advisors’ net returns of -3% per year are similar to their clients’ net returns. Advisors do not strategically hold expensive portfolios only to convince clients to do the same; they continue to do so after they leave the industry.
Linnainmaa, Juhani T., Brian T. Melzer, and Alessandro Previtero, The Misguided Beliefs of Financial Advisors, Working paper, 2017.