Welcome to Financial Advisor IQ

Forget Fiduciary Rules — FAs Simply Need More Education

February 20, 2018

A recent report suggests that rather than more fiduciary regulation of financial advisors, what they really need is more training and education. Turns out that advisors often invest in the same high-cost actively managed funds they put their clients into -- and at the same inopportune times, WealthManagement.com writes.

What’s perhaps more troubling is that advisors and their clients appear to invest the same — and no better than self-directed investors, according to University of Southern California’s Juhani Linnainmaa and Indiana University’s Alessandro Previtero, who are associated with the National Bureau of Economic Research, and Federal Reserve Bank of Chicago’s Brian Melzer, the web publication writes.

Turns out advisors’ trading patterns predict their clients’ trading patterns, according to analysis of trading and portfolio data from 1999 to 2013 on more than 4,000 advisors and almost 500,000 clients furnished by two large Canadian financial companies whose reps make recommendations on mutual funds and asset allocation but who aren’t fiduciaries, according to WealthManagement.com.

The researchers also found that when advisors invest differently from their clients, they opt for even higher expense ratios, better performance and more “idiosyncratic risk,” the publication writes. The researchers conclude that advisors who recommend underperforming strategies aren’t likely to change their behavior if commissions are banned or if they’re held to the fiduciary standard, according to WealthManagement.com.

“When advisors recommend strategies that underperform, they act as an agent exactly as they would as a principal, so aligning their interests would not change their behavior,” the researchers write, according to the web publication. “Solving the problem of misguided beliefs would instead require improved education or screening of advisors.”

By Alex Padalka
  • To read the Wealth Management article cited in this story, click here.