Study Lambasts Professional Investment Advice
A study of investor results conducted by John Chalmers from the University of Oregon and Jonathan Reuter of Boston College shed some light on the financial advice industry. Chalmers and Reuter conducted a detailed study of participants in the 401k-like defined contribution Oregon University System (OUS) plan.
OUS participants have the option of receiving professional advice or self-directing their investment allocations. The researchers found that younger participants were more likely to choose professional advice and their returns suffered in comparison to those who self-directed their investments.
The research disclosed strong evidence that professional advisors (brokers) steered OUS clients into investments that paid brokers the highest fees. “We also find robust evidence,” that brokers guided investors to “invest less in funds that have high fees that are not retained by the broker. This suggests that brokers steer investors away from high fee funds when those fees do not benefit the brokers,” their paper said. The researchers also found evidence of performance chasing by the brokers which also contributed to sub-par returns.
How much did those receiving professional advice suffer versus those self-directing their investments? Brokers cost their investors approximately 1.5% per year over the 10-year study period.
Chalmers and Reuter found that self-directed investors would have done even better in target-date funds, which adjust the allocation between equities and fixed income automatically.