Executive Summary
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 "Market for Financial Advice" 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 Financial Advice Study - Brokers Vs Advisors
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 - Flawed Methodology
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?
