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December 11, 2006
Financial Advisors Useless Says Study
According to a ground-breaking study, the raw returns of equally weighted mutual funds (net of all expenses) for 1996 to 2002 were 6.626% for investors working on their own and 2.924% for funds chosen by advisors.
In other words, the do-it-yourselfer did more than 100% better than financial advisors when it came to selecting equity mutual funds. After factoring in inflation and taxes, clients of financial advisors lost money and lost purchasing power. This should be criminal.
The study, "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry" is written by Daniel Bergstresser of Harvard Business School, John Chalmers of the University of Oregon, and Peter Tufano of Harvard Business School. You are going to be hearing a lot more about this study in the months and years to come. Some are calling it one of the seminal studies of the decade, like those done on asset allocation in the past.
The BCT study (after the initials of the author's last names) is an exhaustive analysis of the cost and performance of more than 4,000 mutual funds sold by financial advisors as compared to those selected by investors on their own over the years 1996 to 2002. This is the first study ever to scientifically quantify the benefits of using financial advisors.
The study attempts to find tangible evidence of a benefit from hiring an advisor by answering these five questions. It appears they came up empty-handed!
1. Do investors who hire advisors get access to funds that would otherwise be harder to find or evaluate? The answer is yes, but as already noted, advisor-selected funds underperform funds that investors select on their own.
2. Do advisors help clients find funds that are lower cost (excluding distribution costs)? After analyzing several trillion dollars worth of transactions, the answer is no. In fact, another new study released in late November by the Zero Alpha Group (ZAG) and Fund Democracy supports this finding. Their study showed investors who buy index funds through brokers pay half a percentage point more in management fees than do independent investors who go through no-load channels - for essentially the same fund.
3. Do advisors give clients access to funds with better performance? Once again, the answer here is a resounding no. Contrary to everything we are led to believe, the evidence shows that advisors not only underperform indexes--they underperform what most people do on their own if they don't have an advisor. If that is not a damning indictment, I don't know what is!
4. Do advisors provide superior asset allocation? After years of research covering trillions of dollars of asset allocations, the finding is that advisors do not provide superior asset allocation. They are as likely to get caught up in the hot sector as we are - possibly more likely.
5. Do advisors help correct bad investor behavior such as chasing fads and chasing performance? Unfortunately, no. In fact, the evidence shows that advisors even contribute to such behavior.
Lest you think the authors were biased against advisors, let me set you straight. They went out of their way to give advisors the benefit of the doubt. Not only that, they were aided in their research by some of the largest and most respected industry groups and research organizations.
One last thing that is worth noting - this study also found that the clients of advisors are less educated and have lower net worth than do-it-yourselfers. You can certainly make a chicken and the egg argument here. But still, let's call a spade a spade. Using an advisor to choose your investments is just plain dumb when you can do better on your own.
What does this mean?
Get educated about personal finance in general and investing more specifically. If you need help, avoid commissioned sales-people like the plague. Seek out someone you can pay a one-time fee, by the hour or a retainer if necessary.
No one is going to take care of your money for you. The only person who has no conflict of interest is you. The person best qualified to handle your money is you -or at least you should be. If you are not, you need to get cracking, right now.
My thanks to Snider Investment Method™ investor Wayne Jackson for bringing this study to my attention. We are going to try to get one of the authors of the study on the radio show. In the meantime, I am curious about what you think. Do these findings surprise you? Do they prompt to you to change what you are doing? Please leave your thoughts and comments below.
SOURCES:
1. Barbara Whelehan. "Do-It-Yourself Investors Win the Race." BankRate.com 6 Dec 2006. http://biz.yahoo.com/brn/061206/20408.html
2. Donald Moine. "The Study of the Decade." MorningStar Advisor 22 June 2006. http://advisor.morningstar.com/articles/doc.asp?s=1&docId=4482&pgNo=0
3. Bergstresser, Daniel B., Chalmers, John M.R. and Tufano, Peter, "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry" (January 16, 2006). AFA 2006 Boston Meetings, Forthcoming Available at SSRN: http://ssrn.com/abstract=616981
4. Mercer Bullard and Edward S. O'Neal. "The Costs of Using a Broker to Select Mutual Funds." Zero Alpha Group November 2006.
http://www.zeroalphagroup.com/news/113006_release.cfm
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.
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