In the November 2010 issue of Investment Executive I reviewed a few different academic papers that attempted to answer the question gracing the title of this blog post. Unfortunately, space constraints precluded me from detailing the titles of the papers and the names of the authors. So, below I’ve detailed and linked to the three papers referred to in the above IE article – in their order of reference in the article.
In Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry, Daniel Bergstresser, John Chalmers and Peter Tufano found that the performance of U.S. mutual funds bought by do-it-yourself investors outperformed those funds sold by financial advisors.
A 2008 paper by Geoffrey Friesen and Travis Sapp, Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability, examined the gap between investor return and published returns of U.S. index funds and actively-managed load U.S. stock funds. They found that index fund investors fared relatively better overall.
Financial Advisors: A Case of Babysitters?, by Hackenthal, Haliassos and Jappelli, 2010 studied data from a German brokerage firm and found that advised accounts didn’t fare well compared to non-advised accounts.
While one of these studies appears to have missed the mark, the others simply suffer from a limitation that applies to all such studies. These limitations were nicely summed up in a recent blog post by economist and author Larry MacDonald, which elicited a slew of comments. The main points: financial advisors’ value-added is more behavioural than the selection of any product and it extends beyond the investment portfolio.