The Misguided Beliefs of Financial Advisors

66 Pages Posted: 20 Jan 2018 Last revised: 23 May 2018

Juhani T. Linnainmaa

USC Marshall School of Business; National Bureau of Economic Research (NBER)

Brian Melzer

Federal Reserve Bank of Chicago

Alessandro Previtero

Indiana University - Kelley School of Business - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: May 16, 2018

Abstract

A common view of retail finance is that conflicts of interest contribute to the high cost of advice. Within a large sample of Canadian financial advisors and their clients, however, we show that advisors typically invest personally just as they advise their clients. Advisors trade frequently, chase returns, prefer expensive, actively managed funds, and underdiversify. Advisors' net returns of −3% per year are similar to their clients' net returns. Advisors do not strategically hold expensive portfolios only to convince clients to do the same; they continue to do so after they leave the industry.

Keywords: Financial Advice, behavioral finance, household finance, investment mistakes, behavioral biases

JEL Classification: D14, G02, G11, G23

Suggested Citation

Linnainmaa, Juhani T. and Melzer, Brian and Previtero, Alessandro, The Misguided Beliefs of Financial Advisors (May 16, 2018). Kelley School of Business Research Paper No. 18-9. Available at SSRN: https://ssrn.com/abstract=3101426 or http://dx.doi.org/10.2139/ssrn.3101426

Juhani T. Linnainmaa

USC Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Brian Melzer

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Alessandro Previtero (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
+1 (512) 581-5420 (Phone)

HOME PAGE: http://aleprevitero.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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