Sunday, August 9, 2009

Do Financial Advisors Provide a ‘Steady Hand’?

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy.

One of the arguments for using financial advisors is that they provide a steady hand that helps keep you from making rash investment decisions that will hurt your returns. A study by Bullard, Friesen, and Sapp released in December 2007 casts doubt on this argument.

The study showed that mutual fund investors actually get lower returns than the funds’ reported returns because of poor market timing. You would think that working with a financial advisor would keep investors from making such mistakes, but apparently not. Another aspect of the study was to examine how investors working with a financial advisor fared compared to other investors.

The study’s authors summarize: “We find that investors who transact through investment professionals using conventional distribution arrangements experience substantially poorer timing performance than investors who purchase pure no-load funds.” Instead of a steady hand, we find that investors working with financial advisors actually have more losses from poor market timing. This raises the question, is the ‘steady hand’ on your shoulder to guide you, or is it in your pocket?

The steady hand argument supposes that financial advisors are actually knowledgeable about investing, and that they have their clients’ best interests in mind. I have no doubt that honest and knowledgeable financial advisors are out there, but they may be scarce.

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