One of the most common ways that financial advisors demonstrate a value proposition to clients is to help clients manage their own behavioral biases and misconceptions; simply put, we help to keep clients from hurting themselves through impulsive, emotionally driven investment decisions. Of course, hopefully most financial planners do more than “just” keep their clients from making bad investment decisions, but it is nonetheless an important starting point. Accordingly, a recent NBER study tried to test this, in what has been characterized as an “advisor sting” study – where the researchers actually went undercover to the offices of advisors, to see what kind of advice would be provided in various scenarios, and unfortunately the results were not terribly favorable to advisors. However, a look under the hood reveals a significant methodological flaw with the NBER study – simply put, they failed to control for whether the people they sought out for advice actually had the training, education, experience, and regulatory standards to even be deemed advisors in the first place, and in fact appear to have sampled extensively from a pool of salespeople with little or no advisory training or focus. As a result, the study might have been better classified as a “salesperson sting” study simply showing that non-advisory salespeople don’t give good advice, regardless of the title they put on their business card. Is that really news to anyone, though?
The inspiration for today’s blog post is a recently released National Bureau of Economic Research (NBER) working paper entitled “The Market for Financial Advice: An Audit Study” by Sendhil Mullainathan, Markus Noeth, and Antoinette Schoar. The stated purpose of the research was noble: to examine the question of whether financial advisors undo, or reinforce, the behavioral biases and misconceptions of their clients? In other words, at the most basic level – do advisors help their clients to make better investment decisions.