One of the most common ways that financial advisors demonstrate a value proposition to clients is to help clients manage their own behavioral biases and misconceptions; simply put, we help to keep clients from hurting themselves through impulsive, emotionally driven investment decisions. Of course, hopefully most financial planners do more than "just" keep their clients from making bad investment decisions, but it is nonetheless an important starting point. Accordingly, a recent NBER study tried to test this, in what has been characterized as an "advisor sting" study - where the researchers actually went undercover to the offices of advisors, to see what kind of advice would be provided in various scenarios, and unfortunately the results were not terribly favorable to advisors. However, a look under the hood reveals a significant methodological flaw with the NBER study - simply put, they failed to control for whether the people they sought out for advice actually had the training, education, experience, and regulatory standards to even be deemed advisors in the first place, and in fact appear to have sampled extensively from a pool of salespeople with little or no advisory training or focus. As a result, the study might have been better classified as a "salesperson sting" study simply showing that non-advisory salespeople don't give good advice, regardless of the title they put on their business card. Is that really news to anyone, though?

The inspiration for today's blog post is a recently released National Bureau of Economic Research (NBER) working paper entitled "The Market for Financial Advice: An Audit Study" by Sendhil Mullainathan, Markus Noeth, and Antoinette Schoar. The stated purpose of the research was noble: to examine the question of whether financial advisors undo, or reinforce, the behavioral biases and misconceptions of their clients? In other words, at the most basic level - do advisors help their clients to make better investment decisions.

Methods And Results Of The NBER Study

The NBER study tested their research question by sending undercover research auditors into the offices of people who hold themselves out as financial advisors, while presenting one of four scenarios: a return chaser who has 30% invested in one sector ETF that performed well last year (and wants to chase another winner this year); an individual who holds 30% of the portfolio in a concentrated position of company stock of his/her employer; an individual who holds a diversified, low-fee portfolio consisting of index funds and bonds; and a "control group" individual who simply holds cash and certificates of deposit and has no particular view beyond wanting to invest for higher returns.

Unfortunately, the results of the study were not positive. It showed that the advisors generally failed to de-bias their clients, and instead often reinforced certain biases that were in the advisors' own interests. The return-chasers were often encouraged to invest in other return-chasing investment options to generate transactions for the advisor to be paid; the low-fee diversified portfolios were encouraged to reinvest into actively managed funds at a higher cost (although the authors appear not to have controlled for how much of the higher cost was simply to pay the advisor, versus the fund being more expensive after controlling for advisor compensation).

Painful Flaws Of The NBER Study

The greatest problem with the study, though - a remarkably simple yet powerful oversight - is that the study failed to control for whether the people actually were bona fide financial advisors in the first place! For instance, in its introduction the study defines financial advisors as those who provide personalized advice, also citing the definition of Investment Adviser under the Investment Advisers Act of 1940. Yet in reality virtually none of the advisors in the study were actually affiliated with RIAs or subject to the '40 Act; instead, they were salespeople at banks and retail brokerage firms, and the only apparent requirement to being deemed a financial advisor for the study was that the person had chosen to write it on their business card!

In fact, the study authors apparently made a deliberate decision to only include these types of "advisors", as they claimed that independent advisors, hourly advisors, and AUM advisors are "too expensive" for the lower end of the wealth spectrum (I guess they've never heard of the Garrett Planning Network's efforts to reach the middle class, or Ameriprise's mass affluent focus?). Not surprisingly, then, the general fact-finding tendencies of the "advisors" in their advice process as reported in the study clearly suggests the "advisors" were simply trying to meet the minimum requirements necessary to substantiate they met the FINRA suitability sales standard - not necessarily to actually deliver effective holistic client-centric financial and investment advice.

Furthermore, the study failed to control in any way for whether the "advisor" in question had any actual training to be an advisor; for instance, there was no controlling for whether the advisor had a CFP certification to substantiate any form of training and education to BE a financial advisor and provide financial and investment advice. And in fact, there is little evidence from the demographics of the "advisor" data provided to suggest that many were CFP certificants at all. The study appears to have disproportionately and almost exclusively sampled from people who have no particular training whatsoever to be actual financial advisors.

As a result of this litany of methodological problems, all the NBER study really measured, in reality, was whether people who are not responsible for investment advice, not regulated as investment advisors, and not trained to be financial advisors, give decent advice about portfolios. Lo and behold, the answer was no - untrained people with no responsibility to give useful advice do not in fact give very good advice; just writing "financial advisor" on a business card doesn't actually make you any good at it. Is anyone surprised?

The NBER Study Missed The Mark

The saddest part of this NBER study fiasco, though, is that the authors apparently thought they were studying real financial advisors. And the authors are not pushovers; not only are they from respected academic institutions, including the Harvard Department of Economics and the MIT Sloan School of Management, but Mullainathan is also the assistant director of research for the Consumer Financial Protection Bureau (CFPB)! If researchers at this level still don't understand the difference between who's an advisor and who's a salesperson because of misleading titles, woe to the American public.

As I see it, the bottom line is this: 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, by controlling for the training, education, experience, and regulatory standards across all the advisors and "advisors" (salespeople) studied.

The NBER study could have helped to make it clear that advice from advisors is different than advice from salespeople - suggesting, perhaps, that it's time to stop salespeople from holding themselves out as advisors when they do not have the training, experience, and proper regulatory oversight to give effective advice. Numerous studies in the past have already shown that how advisors hold themselves out to the public, despite varying levels of training and regulatory standards, is a point of confusion with the public that deserves more study... a problem painfully emphasized by the fact that even the researchers themselves appear to have been confused on this point.

Investor Confusion Reigns Supreme... Still

Sadly, though, the study chose instead to egregiously reinforce these misconceptions, rather than clarify them. A better designed study might have shown that people who call themselves financial advisors who aren't really financial advisors should stop calling themselves financial advisors if they're actually salespeople who give poor financial advice; after all, most people do have a fundamental understanding of the difference between an advisor versus a salesperson, or a butcher versus a dietician, but it's a lot harder when we continue to allow for confusing and misleading titles. Unfortunately, the NBER study lost the opportunity to study this distinction when the researchers chose to irreparably bias their own sample by only studying salespeople who call themselves advisors, and few actual advisors.

Perhaps someday the CFP Board or the FPA will someday undertake or commission a study to help researchers and the public understand that advisors and salespeople aren't the same thing. Perhaps since it's a working paper, it's not too late for the NBER researchers to try to further parse the data they already have to see if there are in fact significant differences between the advice of salespeople, versus the advice of advisors they may have actually captured as a part of their study (although this may not even be possible, given their intentional methodological decision to exclude real advisors, even ones with affordable business models for the middle/working class). In the meantime, though, it appears that true advisors will have to continue to suffer through the confusion between advisors and salespeople.

So what do you think? Is the NBER study a reasonable reflection of the marketplace for advice, or just a narrow subset? Is it fair that the study evaluated the advice of salespeople while deliberately eschewing most true advisors as being "too expensive" for retail consumers? Is this study a relevant call to action for the industry to give better advice, or a recognition that salespeople need to stop calling themselves financial advisors?



  • Nathan Gehring


    While I agree with your conclusions, the study does reflect the perception of reality. The public does _not_ understand that there is a difference, at least not in any meaningful way.

    The study answers the question a consumer might ask: do financial advisors (anybody using that title!) provide good advice? Often that answer is no.

    It is not the study’s fault nor consumer fault that the distinction you have outlined is not understood.

    It is our fault. We wage silly public marketing battles about compensation method and legal requirements and blah, blah blah…but we don’t collectively grab hold of the mantle of financial planning advice and say “THIS IS US AND US ALONE!”

    Neither FPA nor NAPFA nor the CFP Board have been willing to lay claim to financial planning as exclusively their own domains, instead continuing to tie themselves to the financial services industry and SEC registration and on and on.

    If we want to make a true, clear, brightline distinction between financial planning advice givers and everyone else; we must carve our own paths.

    At some point, doctors broke free of snakeoil salesmen and the pharmaceutical industry, of big medicine and big hospitals. We would be wise to do the same and declare ourselves distinctly separate from the sales and product delivery industry. We allow ourselves to be enmeshed, and the public perception will continue to view us that way.

    Studies like this simply reflect perception.

    We can’t look to studies nor legislation to make this distinction for us. We need to accept the responsibility for it ourselves.


    ~~Rant end~~

  • Kevin Condon

    Thanks for the good article, Michael.

    The resolution of the blurred definitions of advice and advisor are important, but entrenched interests in the profession don’t lend themselves to clarification.
    Whose responsibility is it to take this on? Financial Planning Association is conflicted by its diverse membership and stratified leadership. Foundation for Financial Planning is apparently interested in pro bono advice for the poor, a mystifyingly high-minded diversion with no dog in this hunt. NEFE loves literacy programs, and is well-funded by large financial institutions who appear indifferent to definitional problems. NAPFA likes to point out the flaws of others, often from their ivory tower, even though their membership has occasionally harbored mal-practitioners. College of Financial Planning and American College work to keep financial planners current with high-net worth and high-income planning techniques that feign product agnosticity (sic), but favor the practice of AUM and product sales, respectively? Nazrudins like deep thinking. How about government solutions? I believe we are coming to consider that an oxymoron.

    I guess that leaves a few odd balls trying to help the public find advice in new ways. But, come to think of it, what about the “advice” and “advisors” of Veritat, Private Capital, Hello Wallet and other services? How well are they clarifying these issues for financial advice consumers. After all, they give financial advice, often from a nifty black investment advice box! How do they qualify the credentials and licensing of the advisers that they use?

    Looking to Harvard and MIT for quantitative rigor is reasonable. For qualitative understanding? Not so much.

    I admire your work. Keep it up.

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  • Richard Rosso

    Agree with your article Michael. I believe NBER had good intentions. I read this study when it first came out and searched for their definition of “Financial adviser.” They fell to the same trap as the general public. Also, their definition of “good advice,” was too narrow in my opinion. There’s not a financial sales person who is going to recommend a mix of index funds.
    This is their first attempt, intentions are good, my thought is you should make sure someone at NBER receives your writing. Perhaps the next study will be greatly improved.

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  • Robert Vogel

    As the old saying goes, the road to perdition is paved with good intentions. The NBER should be an organization attempting to clear up the public misconceptions, not perpetuating them. This was a sloppy study designed to make headlines, and they got it. As Michael said, it would not take an enormous amount of effort to find qualified advisors, it just wouldn’t have supported their thesis.
    Don’t know if you saw but cited the study in a recent blog post entitled “Financial Advisors are bad for your wealth”

    • Dalta Gosset

      See Gehring’s comments:

      The public does not understand that there is a difference, at least not in any meaningful way.

      The study answers the question a consumer might ask: do financial advisors (anybody using that title!) provide good advice? Often that answer is no.

      It is not the study’s fault nor consumer fault that the distinction you have outlined is not understood.

      • Michael Kitces

        Training, education, and experience of the advisor is certainly a factor the study could have analyzed and controlled for.

        Deliberately sampling from a subset of “advisors” who have little or no training, education, or experience hopelessly biases the sample. It was very inappropriate to generalize the results to all advisors after deliberately selecting a highly non-representative sample; that is an inappropriate research methodology.
        – Michael

  • Andrew Haigney

    I appreciate your view that “highly trained” financial planers, with their holistic approach, do a better job. But, I’ve been in this industry long enough to understand that it’s a humbling endevor even for the best and brightest. My experience is more on the institutional side of the business, and I’d often wonder if CFAs actually deliver superior investment performance versus non-CFAs, I suspect they don’t.

    Unless you have the data to back it up, suggesting that having the right initials after ones name is the key to financial success is just as misleading as a broker inventing his or her own title.

    I have to call you to task regarding advisors vs. salespeople. Advisors don’t get paid until they close the sale. Advisors are salespeople – end of story.

    I enjoy reading your blog.

    • Michael Kitces

      The point here isn’t necessarily about being holistic, but it is about being trained. Certainly, not every CFP certificant is a ‘perfect’ financial planner, no more than every person who has a medical degree is a fantastic doctor.

      Nonetheless, if I had to make a recommendation to someone about finding an advisor, it is a standard in any profession to recommend TRAINED professionals over those who have no such training.

      And the sad reality is that this study not only failed to control for advisor training before coming to conclusions about the quality of advisors, but they created a deliberate methodology that almost certainly drastically undersampled trained advisors, and then generalized their results to all advisors despite their egregiously non-representative sample.

      – Michael

  • Rick Ferri

    How a person earns their money does not always correlate with integrity. I’ve seen good brokers and bad brokers, good advisors and bad advisors. Did Bernie Madoff charge an asset management fee? Yes, he did, and he was TRAINED also.

    • Michael Kitces

      Agreed. My primary concerns were that the study failed to control for the training, education, and experience of the advisor, whether they were conducting a bona fide “advice” business, and whether they engaged in a genuine advice process.

      All of those are factors that impact quality of advice regardless of the manner of compensation. But the study both failed to control for any of them, and sampled in a manner that virtually guaranteed a non-representative sample of the advisory marketplace.

      – Michael

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  • Todd Tresidder

    I think your points are excellent and well taken. My experience is the distinctions between advisor, broker, and the various other terms commonly used barely exists (if at all) in the vast majority of consumer’s minds. Thus the problem.

    My own choice to position as a “financial coach” was to create a clear distinction of my role exclusively as an educator and not a “used securities salesman”.

    With that said, I’ve had to work hard to maintain that distinction in the consumer’s eye since so many brokers and advisors have since adopted the moniker of “coach” in the last decade and further perpetuated the problem.

    In short, the issues are multi-faceted with responsibility existing in all hands affected – industry professionals, regulators, and consumers alike.

    • Michael Kitces

      I agree that most consumers barely recognize the distinction between advisor and broker, even though there is a clear regulatory difference.

      But that’s all the more reason why it’s crucial for academic research and publicized studies to get it right and clarify the misconceptions, not perpetuate the myths and confusion!
      – Michael

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Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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