Professors Put Financial Advisers to the Test – and They Failed

Filbrandt & Company
Nov 27, 2016

Putting Financial Advisors to the Test

A recent study by professors at MIT, and Harvard and Hamburg universities, found the quality of financial advice commonly given to clients was “highly troubling.” 

Those were the words of study co-author Antoinette Schoar in an article on the study’s findings she wrote for the Wall Street Journal.  

“Much research shows that a large fraction of the population is poorly prepared to make these financial decisions (which funds and investment products to pick for your retirement savings) by themselves,” wrote Schoar, the Michael Koerner ’49 professor of entrepreneurial finance and chair of the finance department at the MIT Sloan School of Management. “Typically, when faced with complex and important decisions we rely on trusted experts for advice. Sick people turn to doctors, those accused of crimes seek the help of lawyers, and the list goes on. These cases all have a common feature: The expert adviser must abide by a strict code of conduct that puts the interest of the client first.”  

Schoar wrote that the same is not true for financial advisers.  

“A majority of these professionals are not registered as financial advisers who have a fiduciary responsibility to their clients, which means putting their clients’ interest first,” she wrote. “Instead, they are registered as brokers who only adhere to what is known as a ‘suitability’ standard, which is much vaguer and only asks brokers to make recommendations that are consistent with the client’s interest.”  

Additionally, the majority of brokers are not paid on the basis of the quality of their advice, but rather on the fee income they generate from their clients, she wrote.  

“To resort to a medical analogy, this is equivalent to simply prohibiting doctors from recommending drugs that kill you, while not actually requiring they prescribe the best drugs to cure your disease,” Schoar wrote.  

The study sent “mystery shoppers” to financial advisers in the greater Boston area. The mystery shoppers impersonated regular customers seeking advice on how to invest their retirement savings outside of their 401(k) plans. They represented different levels of bias or misinformation about financial markets.

“By and large, the advice our shoppers received did not correct any of their misconceptions,” Schoar wrote. “Even more troubling, the advisers seemed to exaggerate the existing misconceptions of clients if it made it easier to sell more expensive and higher fee products.”  

Realities like the ones affirmed in the study co-led by Schoar led the United States Department of Labor to rule in April that all financial professionals providing advice on retirement plans must operate under the fiduciary standard. In essence, it means they must serve as fiduciary, meaning that they must put the interests of their clients above all others, including their own. Many professors are surprised to learn that all financial advisers do not work under that standard.  

Fortunately for our clients, Filbrandt & Company has operated under the fiduciary standard for decades. This means Filbrandt & Company is bound to make recommendations that are in our clients’ best interests. Filbrandt & Company does not sell financial products, meaning they have no motivation to sell you anything which might be better for their financial accounts than yours.  

The university study found that the opposite is true in an alarming number of instances.  

“We found that advisers appeared willing to make their clients worse off in order to secure financial gain for themselves,” Schoar wrote. “This is bad news for savers -- including the many baby boomers -- seeking to boost their retirement nest egg.”  

Schoar said the study found “that advisers who have a fiduciary responsibility toward their clients provided better and less biased advice than those that were merely registered as brokers.”  

“Removing the conflicts of interest that a broker relationship naturally brings allows for a much deeper relationship with a client,” said Scott Kornstedt, Certified Financial Planner with Filbrandt & Company. “I think this is why our client relationships are rarely severed and last for many years and generations in some circumstances.”   

You can put your adviser or any financial adviser to the test via Filbrandt & Company’s checklist report.  

If you have questions about how Filbrandt & Company can make a difference for you as a fiduciary financial adviser, please submit them above and we will respond within two business days.

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