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Are Financial Advisers Encouraging Bad Behavior?

Not only do many financial advisers fail to discourage behavioral finance errors by investors, but many advisers also reinforce behaviors that are in their own best interest, according to a new working paper published by the National Bureau of Economic Research. Researchers at Harvard University, MIT and the University of Hamburg found that advisers “may exaggerate existing biases or, in some cases, even make the clients worse off.”

The study sent auditors on 284 client visits to gather information from advisers. The auditors described their current investment strategy to the advisers as one of the following:

  • Chasing returns, a scenario where they attempted to beat the market by identifying those industries that performed the best in the recent past;
  • Investing 30% of their portfolio into their employer’s stock;
  • Owning a well-diversified portfolio comprised of low-fee U.S. index stock and bond funds; or
  • Holding all investable money held in certificates of deposit and expressing no preconceived investment biases.

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Discussion

Bernice from New York posted about 1 year ago:

Does any investor really think that many (all)
"advisers" do NOT act in their own self interest?


Jerry Durham from Tennessee posted 8 months ago:

I too use to think that actively managed mutual funds was the way to go. It was easy to feel this way during the 1990's when actively managed funds led the way during the great Bull Market. Since then, it has been hard to beat index funds and this is due to their ultra low fees. However most advisors still like active funds, even though the majority do not beat low cost index funds. In the past I have owned both load and no load funds, and although several load funds are consistently good, I feel that most investors are better off with index funds.


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