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“Mystery Shoppers” Show Fiduciary FAs Are Less Biased

October 31, 2016

Financial advisors are likely to encourage investors’ misconceptions if it means they can sell them higher-fee products, according to a “mystery shopper” experiment cited in the Wall Street Journal.

Fiduciary advisors, however, provide less-biased advice than brokers operating under the suitability standard, Antoinette Schoar, professor of entrepreneurial finance and chair of the finance department at the MIT Sloan School of Management, writes in the Journal. That’s according to a study Schoar conducted with co-authors Sendhil Mullainathan at Harvard University and Markus Noeth at Hamburg University.

In the study, mystery shoppers pretending to be retirement savers looking to rollover their 401(k) plans sought help from Boston-area financial advisors. The mystery shoppers exhibited various biases and misconceptions about markets, and advisors “by and large” didn’t correct them, according to Schoar, who doesn’t mention how many advisors were tested in this manner.

The advisors also tended to exaggerate the misconceptions if it allowed them to peddle more expensive products, she writes. And while some financial research suggests the average investor should opt for low-cost index funds over actively-managed funds, which typically come with higher fees, only 7.5% of the advisors in the experiment encouraged index funds, according to Schoar.

Advisors working under the fiduciary standard, which requires them to put clients’ interests first, were less biased than registered brokers operating under the suitability standard, which only requires advisors to make recommendations in line with clients’ interests, she writes.

Therefore, the Department of Labor’s fiduciary rule, which requires retirement brokers to operate as fiduciaries and goes into effect in April, will be “beneficial,” Schoar asserts.

But the benefit is not for retirement investors alone, she writes. Poorly informed investors make it more difficult for financial advisors who already put clients’ interests ahead of their own to compete with less scrupulous advisors out to only enrich themselves, according to Schoar.

By Alex Padalka
  • To read the Wall Street Journal article cited in this story, click here.