Could financial advisors who offer comprehensive services be doing a better job? Two recent studies shed a positive light on the potential of the financial planning profession to do right by their clients.
Both studies aim to quantify whether advisors add value by helping clients achieve better financial outcomes, which is defined as the potential to spend more in retirement. Both studies attempt to quantify the value of planners in terms of their ability to increase lifetime consumption, rather than trying to measure investment performance through single-period alpha measures.
Regrettably, our profession has been portrayed in a negative light in prior academic studies. Perhaps most famously in planner circles, a March 2012 study, The Market for Financial Advice: An Audit Study, from the National Bureau of Economic Research (NBER), concluded that financial advisors reinforce behavioral biases and misconceptions in ways that serve the advisors’ interests. But such studies have tended to investigate brokers who could be better characterized as salespeople rather than advisors.
Comprehensive planners vs. salespeople
In a blog post, Michael Kitces of the Pinnacle Advisory Group explains that the painful flaw of the NBER study is that it focuses on how salespeople provide advice to earn more commission income rather than to help customers. By the authors’ own admission, their categorization of advisors included only salespeople working at banks and investment firms. Such “advisors” are subject only to a suitability sales standard for their investment recommendations. They may have little training and no responsibility to provide advice that meets the higher standard of fiduciary care.
The NBER study did not consider advisors who actually work as Registered Investment Advisors subject to SEC oversight and have a fiduciary duty to their clients under the Investment Advisers Act of 1940. It also did not consider whether the advisors in the study were trained to provide financial advice. The study concluded that financial advisors do not provide good advice, without attempting to provide any measure or control over the quality of the financial advisor and without making any effort to include trained advisors in the study.
“The NBER research study could have been an opportunity to demonstrate the difference between a true advisor – one who has responsibility to give quality advice, is regulated as such, and has the training to do so – and a salesperson,” Kitces concluded, “by controlling for the training, education, experience, and regulatory standards across all the advisors and ‘advisors’ (salespeople) studied.”
Now, let’s look at the two recent studies.