Your financial advisor/RM is likely making investment mistakes.
This is not because they are malicious.
Rather, it is because they truly believe in their (misguided) advice.
They are also influenced by their incentive structure, which is simple: Sell.
No sales = no income. If you want to put food on the table, you have to sell.
And finally, advisors are also human, subject to the same behavioural biases as we are.
Mistake 1: The “financial advice” given is suboptimal
In a sample of Canadian financial advisors, they manage their own personal portfolios in the same manner they manage their clients. They trade frequently, chase high returns, and show a preference for expensive, actively managed funds.
We should trade as little as possible, stick to our strategy, and keep fees and taxes to a minimum. That means globally diversified index funds and an appropriate asset allocation of cash, stocks, and bonds.
You might think that they are doing this because they are financially motivated to do so.
But they continue to pursue these strategies even after leaving the financial industry.
So they really believe in the misguided advice they give.
Mistake 2: They are incentivised to sell
As Charlie Munger said, show me the incentive and I’ll show you the outcome.
Financial advisers and RMs are incentivised to sell, even if it isn’t in the best interest of their clients.
A 2018 study found that bank-advised clients make trades that are more profitable for the bank, but leave the bank-advised clients worse off than unadvised clients.
In other words, incentives matter.
Mistake 3: To err is human
Advisors have a big influence on client portfolios.
An advisor’s own portfolio is a big determinant of clients’ portfolio compositions.
A good advisor will de-bias a client (e.g. getting a client to invest instead of keeping their money in cash). But if the bias lines up with the advisor’s own incentive, they will not.
All of this tells us that we should take the “advice” from advisors with a mountain of salt.
If you are not paying them for the advice, then consider carefully who their ultimate paymaster is, and what their motivations are.
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