How much should we trust a Financial Advisor?

How much should we trust a Financial Advisor

In U.S.A. 75% of investors consult some type of financial advisor before making an investment. In Spain, the sales tables of banks and savings banks perform this function with their clients, and operate in parallel with other independent advisers. In my entry last month we saw an example of the incentives that have the tables of placement of banks and boxes to sell those products with higher commissions even when these are not very good. Given these premises, we can ask ourselves how good the advice received by financial advisers is. Are they advice interested? Do consultants react excessively to their own incentives? Do they tend to tell us what we want to hear to ensure a sale?

How much should we trust a Financial Advisor

Although it is reasonable to suspect that some of these biases are present, it is important to measure them and confirm them empirically. For this Mullainathan, Nöth and Schoar performed the following experiment. They hired and trained a group of auditors whose mission was to visit independent financial advisers. During the visits, the auditors pretended to be clients looking for an investment product for their savings. The auditors acted as false clients with different demographic characteristics (marital status, age), and financial (amount to invest and portfolio in which it is currently invested). More than one auditor was sent by financial advisor.

The results of the study are the following. First, a positive result. The financial advisors take into account the demographic conditions of the clients. They recommend more conservative portfolios for clients with lower income and greater risk aversion. Second a negative result. Financial advisors have an excessive bias towards active management products, structured products and, in general, those with higher commissions. They tend not to recommend passive investment products that replicate an index and that entail lower commissions.

Basically, financial advisors recommend those products that give them the highest income even when they are not suitable for the client. This second result may not be surprising (once again the agents react to the incentives), but it is not so obvious in an environment where reputation and repeated interaction are important. Finally, another result not hopeful. Financial advisors tend to tell the client what they want to hear. For example, investors whose portfolio is constituted solely by shares of the company in which they work (it is generally not a good idea to put all the eggs in the same basket) do not receive advice on diversification.

Angol, Cole and Sharkar perform a similar experiment. They send auditors to sellers of life insurance in India. In India, two types of insurance coexist. Insurance in which an annual premium is paid for an annual coverage (in which the premium is lost if death does not occur) and insurance in which an annual premium is paid that is capitalized and received at death or upon completion of 80 years.

The authors argue that given the current premiums the first contract becomes up to 70% cheaper than the second and has additional benefits. The advantage of one contract over another depends, among other things, on the customer’s age and preference for liquidity. Again the authors sent auditors, camouflaged by buyers, who asked the insurance vendors.

For more info about such business topic’s or matters or you wanna learn about more business studies online, you just need to visit Business Study Notes. Business Study Notes is all about MBA, BBA and DBA notes and business study online. You may easily get ready for your exams through Business Study Notes.