Clients’ expertise more important than wealth advisers in boosting returns
Returns claimed by independent financial advisers are boosted by the sophistication of their clients rather than their own efforts, according to new research.
The researchers processed more than 32,750 German client accounts between 2001 and 2006, comparing performance achieved by people using advisers against those who did not.
Publishing under the auspices of the Centre for Economic Policy Research, the report found advisers were in the fortunate position of being retained by wealthier, older, individuals, less prone to rash decisions. According to the report: “They are similar to babysitters matched with well-to-do households.
They perform a service that parents themselves could do better.
“They charge for it, but observed child achievement is often better than what people without babysitters obtain because other factors are favourable.”
The researchers of the report, entitled Financial Advisors: A Case of Babysitters?, were Andreas Hackethal and Michalis Haliassos of Goethe University and Tullio Jappelli of Università di Napoli Federico II. They confirmed that individuals aged 60 or over were far more likely to use an independent adviser than an investor younger than 30.
Younger males, the sector of society that is most frequently over-confident, are less inclined to seek third-party advice.
Older, more sophisticated, investors, who like a second opinion, are more likely to invest successfully as a result of their efforts.
The report cites studies which confirm that experience can teach people to cut their losses, an important factor behind outperformance. It said: “Experience tends to lower the share of directly held stocks.”
One factor results from individuals becoming less over-confident as they became older: “Advisers… do not appear to have a significant effect on the fraction of the account invested in stocks.”
Larger accounts, which tend to be retained by older investors are often more stable in value as a result of using diversified strategies.
Advisers can offer good advice, particularly when it comes to encouraging diversification. But they also charge fees, trade more frequently and seek to boost product sales.
According to the report: “Those who choose to collaborate with an independent financial adviser end up obtaining lower returns than what peers obtain who do not involve advisers in the running of their brokerage account. Whether we control for initial account volume or not, the contribution of an adviser to the total account return is negative, once we control for observable characteristics of the account owner.”
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