Financial advisors might not be offering strong enough advice, according to a study by a Harvard professor.
The report, co-authored by Sendhil Mullainathan and reported on by Fortune, finds financial planners often reinforce our bad investment behaviors instead of correcting them. The “yes-man” tendencies of the financial advisors led investors to keep money in company stock and avoid diversification of their portfolios.
Sticking With Investors’ Plans
Mullainathan’s study commissioned actors to visit Boston-area financial advisors on nearly 300 occasions in 2008. Each actor played the role of an investor seeking sound advice.
The actors were split up into four groups, based on investment strategy. One group was invested mainly in index funds; a second told advisors they were interested in actively seeking a new, hot market sector; a third said 30% of their assets were tied to their employer’s stock, and the last said they owned only cash assets.
Most often, the actors received advice that matched the slants of their current portfolios. For example, cash-heavy investors were told to invest in index funds, seekers of hot stocks were pointed toward hands-on investments and those with company stock were usually told to hold on to their company shares. Only 40% of advisors told those with company stock to diversify their portfolios, despite the obvious benefit the investor (and the planner, due to commission) would have received from a better yield.
According to the study, financial planners often avoided appearing confrontational for fear investors would not return if they did not hear what they wanted to hear. A study by the Employee Benefit Research Institute found two-thirds of those interested in the services of an analyst if their advice would match their own investing philosophy.