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preet banerjee

"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.

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 You can also follow him on twitter at @PreetBanerjee

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