Skip to main content

"Financial advisers flunk undercover sting." That was a headline that circulated on social media earlier this month.

A National Bureau of Economic Research (NBER) working paper, The Market for Financial Advice: An Audit Study was released in March by the U.S. non-profit research organization.* Ammunition for the broad-stroked war on financial advisers was again replenished.

Don't get me wrong, I've been pretty vocal on the shortcomings of the traditional financial advice delivery models myself, but I'd like to think I've been a bit more balanced than simply stating "all financial advisers are evil and this just proves it again," which is essentially what is concluded in this study.

Story continues below advertisement

I believe that the majority of Canadians would benefit from good financial advice, with an emphasis on the planning where an adviser can actively and easily demonstrate value, as opposed to focusing solely on the investing. The best value for an investor can often be found in being less active in terms of trading, a fact which puts clients and advisers at odds with each other.

In the study, actors were trained and sent into the offices of Boston area advisers a total of 284 times. The actors were given one of four different scenarios with which to present to the advisers and then provided detailed notes to the study's authors after the meetings. The data showed a propensity of advisers to move actors coming in with index funds into higher-fee actively managed funds. For actors coming in with return-chasing behaviour, which entails a lot of fee-generating trading, advisers did little to dissuade them from continuing with that behaviour. For the most part, the study showed that the advisers' recommendations put advisers' pockets ahead of their clients.

While a financial advice model predominantly made up of commission-based advisers would be expected to generate such a finding, there are a number of areas in which this particular study could be improved that would increase the validity of – or even change – the findings.

There was no mention of the quality or credentials of these financial advisers. Based on the fact that advice was given out during the first, and only, meetings between actors and advisers, that pretty much excludes financial planners from the data set. A Certified Financial Planner (CFP) will use the first meeting to gather information about the client without providing substantive recommendations until after working up a plan.

Certainly, not all advisers are created equal. But before we throw out the baby with the bathwater, a better perspective on this study would be to read it with a different frame of mind: "Financial salespeople flunk undercover sting" would have been much more appropriate.

*Costs $5 for a copy of the study

Preet Banerjee, B.Sc, FMA, DMS, FCSI, is a W Network Money Expert, and blogs at wheredoesallmymoneygo.com. You can also follow him on twitter at @PreetBanerjee

Report an error Editorial code of conduct
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter