Wednesday, October 17, 2012

Fun with Studies of the Value of Financial Advisors

Do you think a financial advisor would rather take on and keep a client who already has a lot of money or a client with little savings? The answer is obvious, but this fact was missed by University of Montreal researchers who conducted the Cirano study of the value of financial advisors.

The researchers collected survey data from 3610 working-age Canadian households. They asked many questions related to income, savings, and financial advisors. Among their conclusions was the following:
“Controlling for multiple factors ... Those with 15 years or more [with a financial advisor] will have 173% more assets than if they did not have a financial advisor.”
The study’s authors offer the following thoughts on this conclusion:
“This amount is too large to be explained simply by better stock picking. One highly plausible explanation of this finding comes from the greater savings that is associated with having a financial advisor and other appropriate advice.”
Despite the fact that this 173% figure seems like conclusive proof that advisors give great value in helping their clients save and grow their money, I think there is a better explanation related to the question from the opening paragraph.

I went through the survey questions in Appendix B of the report to confirm that the researchers didn’t ask any questions about how much money advised people had before they took on an advisor or how much money non-advised people had in the past. So, previous wealth could not be part of the controlling factors. At least part of this 173% edge for advised people must come from advisors seeking out clients who already have significant assets.

Another problem is that an advisor-client relationship is more likely to sour if the client fails to save much. So, looking at people who have had an advisor for 15 years will create a large survivorship bias when you try to measure whether an advisor helps people save more money. It could be that advisors help people save more money, but it could also be that advisors dump clients who don’t save enough money.

When it comes to controversial research, it’s common for critics to focus on small problems and blow them out of proportion to unfairly discredit the work. However, in this case, the bias caused by the need for advisors to find clients with significant assets (and avoid those with little money) is potentially large enough to completely swamp the finding of a 173% edge in savings for people working with an advisor for 15 or more years. This paper adds next to nothing to the question of whether financial advisors help their clients.


  1. Previous study of such kind investigated the relation between person's income and make of the car he/she drives. Study concluded that driving BMW increases income.

    Do not blame researchers too much, in the capitalism game they make their living the best way they can.

  2. @Larry: I agree with oyu that there is a big difference between someone who just sells financial products and someone who offers advice. I didn't form any opinion on the motives of the study's authors. Perhaps you have more informaiton on this than I do. I just took the study at face value and found what I think is a serious problem that undermines one of their conclusions.

    @AnatoliN: Good one :-) A similar study would likely find that buying a yacht makes you richer.

    1. The first reply above is to two comments from Larry Elford Visual Investigations:


      Thanks Michael. Good comments. Here is what I posted about this study on my facebook group titled albertafraud.

      WOW! 51 pages of academic study called "THE VALUE OF ADVICE".
      Notwithstanding that it was sponsored by financial industry stakeholders who earn billions by misrepresenting "product salespeople" as "professional advisors".
      Notwithstanding that this academic failed to address even the differences between a (1) salesperson, (2) people licensed as advisor and (3) people NOT licensed but calling themselves "advisor" (see #1) and (4) portfolio manager. Here is how your money gets fooled every day. Buy an "academic" study.


      Larry Elford The entire thing seems to not know, explain, or understand even the most basic premise………namely "what is the difference between a (1) financial products salespersons, and (2) a licensed and registered "advisor", and (3) real portfolio management expertise.

      I feel this entire study is bunk, because it makes the mistake of assuming that the person who calls themselves #2 above is actually #3 and helping you, when in fact they are nothing more than #1, lying and misrepresenting themselves for a commission (at least four out of five according to product sales stats)

      WTF??? Who did this study and why are they claiming expertise in areas they do not even understand?

  3. @Promod: I think you've uncovered another possible conclusion we can draw from the years of using an advisor data: young people value advice less than older people :-)

    1. The comment above is a reply to Promod's comment:

      Did you notice that on average people age 18-34 used advisors for fewer years than people age 65+ (page 3)? Perhaps 18 year olds would get better results if they used advisors for 20+ years :)

      Think of the resources that went into this study. At least the Private Sector Partners are shown (page 50).

  4. Conclusion: To end up with a million dollars, first start with 2 million dollars and a financial advisor? :)

  5. @LifeInsurance: That's funny. But, at the risk of making a serious reply to a comment meant as a joke, I don't think we can conclude from this study that advisors harm their clients. We really can't conclude much in either direction.