Financial advisers, ill-fitting cobblers…

The study finds that they are poor investors, an average performance 3% below the benchmarks

Posted on April 25, 2021

Nicolas Berube

Nicolas Berube
The press

We often rely on our financial advisor to make our investment choices. But what investments are in the personal portfolio of our advisor? More importantly: is it able to get good returns?

A new study conducted in Canada and published in the current issue of Journal of Finance reveals that, contrary to popular belief, financial advisors are bad investors.

Researchers at Dartmouth College, a private university in New Hampshire, found that financial advisors earn annual returns 3% below benchmarks, on average, after fees are included, almost the same return as their clients.

To reach these results, co-authors Juhani Linnainmaa, Brian Melzer and Alessandro Previtero accessed data from the personal portfolios of more than 3,000 Canadian financial advisors and 500,000 clients for the years 1999 to 2013.

The researchers found that the “best” financial advisors had an average annual return of about 2% lower than the benchmarks, while the worst had returns almost 4% lower.

“The misguided beliefs of financial advisors are the source of their expensive portfolios,” they explain in their study, “The Misguided Beliefs of Financial Advisors.”

Its poor performance stems from two factors. First, advisors typically invest their own money and their clients’ money in mutual funds (commonly known as mutual funds), products that come with high annual management fees (often 2% of the portfolio size per year), which slows down asset growth.

Second, advisors were engaging in poor investor behaviors, costing them valuable performance points. “This includes a lack of diversification, a high trading frequency, a tendency to favor funds that have had few high returns – despite the fact that these strategies are associated with underperformance,” write the authors.

> Read the study “The Misconceptions of Financial Advisors”

The study shows that financial advisors continue to underwrite the markets even after they leave their jobs, change jobs or retire, indicating that they were not building these underwritten portfolios to promote certain products to their clients.

“Change their beliefs”

According to the authors, financial advisors must “change their beliefs” if they want to improve their advice and performance.

Few advisors know, for example, that active portfolio management and stock picking typically produce lower returns and more volatility than buying passive, diversified investments like exchange-traded funds (ETFs).

Richard Morin, president and CEO of Archer Wealth Management, notes that the study uses data from 1999 to 2013, and that the greater popularity of ETFs in four or five years could only improve the overall picture.


Richard Morin, Chairman and CEO of Archer Wealth Management

That said, the study debunks the myth that a financial advisor is someone with a unique ability to make money work. There is nothing more false than that.

Richard Morin, Chairman and CEO of Archer Wealth Management

A poor performance of a few percentage points may not seem like much. But for an investor, a shortfall of 2% per year can make a difference of hundreds of thousands of dollars, or even more, during his life, notes Richard Morin.

“It’s the difference between spending your retirement traveling or spending your retirement on your balcony.”

Marc-André Turcot, portfolio manager of Demos gestion de patrimoine familial (Raymond James) and lecturer at the University of Sherbrooke, notes that the financial advisors analyzed by the researchers have the same emotional bias as their clients – which is far from ideal.

“This is the first time I have seen a study that analyzes the performance of the client and the adviser, and that explains a lot! he says.

Most advisers chase high returns, which, paradoxically, can produce below-market returns, especially when selling during a major correction, he notes.

“The long-term return of the stock market is stable and is around 9%,” says Mr. Turcot. Yet very few investors or financial advisors achieve this growth.

Above all, we see a lack of emotional management.

Marc-André Turcot, portfolio manager and lecturer at the University of Sherbrooke

Although ETFs have management fees that are often 80-90% lower than those of actively managed mutual funds, they are not often offered to clients because large financial institutions have no advantage in using them of them, notes Richard Morin.

“For them, these products yield too little in management costs.”

Marc-André Turcot notes, however, that an ETF portfolio can also do harm if the investor or financial advisor in charge does not control his emotions and tries to buy and sell in anticipation of the direction of the markets.

“Beyond fees, strategic approach and emotional management are factors to consider in managing a portfolio, whether assisted by an advisor or not.”


This is the proportion of Canadian households that use the services of a financial advisor, according to the survey The Canadian Financial Monitor (CFM).

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