Recently, The Conference Board of Canada came out with the report Boosting Retirement Readiness and the Economy Through Financial Advice (sign up required—readers may prefer to simply search for the title online). They conclude that if more people used financial advisors, they would save more money, and the country would benefit over the long term. Unfortunately, it relies on a flawed study.
This new study does not do any original research into the effects of financial advisors; the authors rely on previous work. They acknowledge that advisors do not produce enough extra returns to cover their fees, but that “the real benefit of having an advisor may not be performance-related at all. It may have more to do with engendering beneficial savings behaviour among clients.”
Unfortunately, the authors rely primarily on the 2012 study Econometric Models on the Value of Advice of a Financial Advisor to justify the claim that financial advisors boost savings. A couple of years ago I pointed out the serious flaws in this study. I’ll briefly summarize.
Advisors seek out clients who already have significant savings. The 2012 study did not control for initial wealth. Advisors tend to drop clients who fail to save enough money over time; these clients don’t generate enough fees to justify the effort of providing them financial advice. The 2012 study did not account for this factor which created survivorship bias in their data.
Based on the flawed 2012 study, The Conference Board simply presumed that if enough people currently not receiving advice began using an advisor, their savings rates would rise by amounts indicated by the 2012 study. Even if we had a solid study showing that advisors encourage higher savings, it is very likely that the amount of increased savings would be far less than indicated by the 2012 study.
There is another source of bias here. Those people who actually have the skills to handle their own money tend not to use advisors. When The Conference Board study presumes that a fraction of people not using an advisor start doing so, this will include some people already managing their money well. If some of these people started paying for advice, their savings would be lower over time due to advisor fees. In my case, if I used a financial advisor, I’d have paid fees over the years adding up to the price of a house.
I have no doubt that most people could use good financial advice. However, the current Canadian model where advisors sell expensive actively-managed mutual funds leads to high costs and minimal real advice. We need a model where people pay for advisors separately from paying for mutual fund management. This will lead to increasing the number of advisors who are more than just mutual fund salespeople.