What are financial advisors (measurably) useful for? (EP.249)
The Rational Reminder Podcast
The Conflicts of Interest in Financial Advice
In one study, bank financial advisors recommend the banks own mutual funds and structured products to the detriment of their clients. Another paper looks at the misguided beliefs of financial advisors. The research could show that firms specifically select advisors who will deliver sincere but misguided advice to clients. It's crazy how much research has been done on conflicts of interest in financial markets.
Our focus for this episode is the real utility of financial advisors, and Ben shares a host of research and findings about the supposed and actual value that advisors can offer investors. This segment continues our exploration of investment basics, a fundamental theme for this show and our work at PWL Capital. One of the biggest and clearest lessons that becomes apparent through this discussion is the need for financial literacy independent of advice and so-called expertise from the outside. With that said, we do find time to share some of the positives investors can accrue from dealing with a trustworthy advisor and the conditions necessary for this. Later in the episode, our colleague Lukas Fleck joins us to share his review of The Obstacle Is the Way by Ryan Holiday and some of his own reading habits and tips. We finish the episode with lighter content about hot sauces, TV shows, and Ben's latest home improvement.
Key Points From This Episode:
• Introducing today's question about the usefulness of financial advisors. (0:03:35)
• Common financial mistakes made by households. (0:11:13)
• Some of the research and findings grounding today's discussion. (0:18:13)
• Investing and self-control; what we can learn from data about smokers. (0:22:49)
• Looking at some of the potential benefits of hiring an advisor for investors. (0:28:40)
• A quick review of Episode 43 with Dave Butler from 2019. (0:34:07)
• Today's book review of The Obstacle Is the Way, with Lukas Fleck, and some of the biggest takeaways. (0:36:43)
• A look at Lukas' reading habits, favourite recent books, and his increased focus on getting through books. (0:44:59)
• Advice for starting a book club and Lukas' reading hacks. (0:50:49)
• The after-show; Ben tells us about his basketball hoop, last week's episode of Succession, and the hot sauce debate. (0:54:44)
• Upcoming events, audience reviews, and future guests on the podcast. (0:58:31)
Ad mentioned by Ben:
Participate in our Community Discussion about this Episode:
Books From Today’s Episode:
The Obstacle Is the Way: The Timeless Art of Turning Trials into Triumph — https://amzn.to/3MXh1dl
The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money — https://amzn.to/3UM8KLb
Deep Work: Rules for Focused Success in a Distracted World — https://amzn.to/3AuSXqZ
Making Numbers Count: The Art and Science of Communicating Numbers — https://amzn.to/41HXnWK
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/
Shop Merch — https://shop.rationalreminder.ca/
Join the Community — https://community.rationalreminder.ca/
Follow us on Twitter — https://twitter.com/RationalRemind
Follow us on Instagram — @rationalreminder
Benjamin on Twitter — https://twitter.com/benjaminwfelix
Cameron on Twitter — https://twitter.com/CameronPassmore
Lukas Fleck — https://www.pwlcapital.com/profile/lukas-fleck/
'Restoring Rational Choice: The Challenge of Consumer Financial Regulation' — https://www.aeaweb.org/articles?id=10.1257/aer.p20161127
'Financial literacy and financial resilience: Evidence from around the world' — https://onlinelibrary.wiley.com/doi/abs/10.1111/fima.12283
'Strategic price complexity in retail financial markets' — https://www.sciencedirect.com/science/article/abs/pii/S0304405X08002092
'Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets' — https://academic.oup.com/qje/article-abstract/121/2/505/1884013?redirectedFrom=fulltext
'The Role of Time Preferences and Exponential-Growth Bias in Retirement Savings' — https://www.nber.org/papers/w21482
'Contract Design and Self-Control: Theory and Evidence' — https://www.jstor.org/stable/25098689
'Restoring Rational Choice: The Challenge of Consumer Financial Regulation' — https://www.aeaweb.org/articles?id=10.1257/aer.p20161127
'Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds' — https://dash.harvard.edu/bitstream/handle/1/4686775/Laibson_OnePriceFail.pdf
'Failure to refinance' — https://www.sciencedirect.com/science/article/abs/pii/S0304405X16301507
'Down or Out: Assessing the Welfare Costs of Household Investment Mistakes' — https://www.jstor.org/stable/10.1086/524204
'Financial literacy and stock market participation' — https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000717
'Attention Induced Trading and Returns: Evidence from Robinhood Users' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3715077
'Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock' — https://www.jstor.org/stable/2697737
'$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans' — https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3158583/
'Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving' — https://www.journals.uchicago.edu/doi/10.1086/380085
'Annuitization Puzzles' — https://www.aeaweb.org/articles?id=10.1257/jep.25.4.143
'The Market for Financial Advice: An Audit Study' — https://www.nber.org/papers/w17929
'Understanding the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market' — https://www.hbs.edu/ris/Publication%20Files/12-055_13c23c02-e57f-4aea-9630-316aa4b772ce.pdf
'Fiduciary Duty and the Market for Financial Advice' — https://www.nber.org/papers/w25861
'Conflicting Interests and the Effect of Fiduciary Duty: Evidence from Variable Annuities' — https://academic.oup.com/rfs/article-abstract/35/12/5334/6674521
'How (not) to pay for advice: A framework for consumer financial protection' — https://www.sciencedirect.com/science/article/abs/pii/S0304405X12000074
'Financial Advice and Bank Profits' — https://academic.oup.com/rfs/article-abstract/31/11/4447/4985213?redirectedFrom=fulltext
'The Misguided Beliefs of Financial Advisors' — https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12995
'Retail Financial Advice: Does One Size Fit All?' — https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12514
'The Ulysses option: Smoking and delegation in individual investor decisions' — https://www.sciencedirect.com/science/article/abs/pii/S1544612321003962
'Smoking hot portfolios? Trading behavior, investment biases, and self-control failure' — https://www.sciencedirect.com/science/article/abs/pii/S0927539821000463
'Exponential Growth Bias and Household Finance' — https://www.jstor.org/stable/27735191
'Money Doctors' — https://scholar.harvard.edu/files/shleifer/files/moneydoctors_journaloffinance.pdf
'The Costs and Benefits of Financial Advice' — https://www.hbs.edu/faculty/Shared%20Documents/conferences/2013-household-behavior-risky-asset-mkts/Costs-and-Benefits-of-Financial-Advice_Foerster-Linnainmaa-Melzer-Previtero.pdf
'Time is money: Rational life cycle inertia and the delegation of investment management' — https://www.sciencedirect.com/science/article/abs/pii/S0304405X16300472
'Passing the buck: Delegating choices to others to avoid responsibility and blame' — https://www.sciencedirect.com/science/article/abs/pii/S0749597815300108#:~:text=One%20simple%20way%20to%20avoid,outcome%20on%20the%20other%20person.
'Expert financial advice neurobiologically "Offloads" financial decision-making under risk' — https://pubmed.ncbi.nlm.nih.gov/19308261/
'Impact of inflated perceptions of financial literacy on financial decision making' — https://www.sciencedirect.com/science/article/abs/pii/S0167487020300672
'Precautionary savings, retirement planning and misperceptions of financial literacy' — https://www.sciencedirect.com/science/article/abs/pii/S0304405X17301551
'Behavioral and wealth considerations for seeking professional financial planning help' — https://fpcanadaresearchfoundation.ca/media/khyfoso3/financial-services-reveiw-publication.pdf
'Financial literacy and the demand for financial advice' — https://www.sciencedirect.com/science/article/abs/pii/S037842661400096X
'Does financial literacy affect the value of financial advice? A contingent valuation approach' — https://www.researchgate.net/publication/338669648_Does_financial_literacy_affect_the_value_of_financial_advice_A_contingent_valuation_approach
'How financial literacy shapes the demand for financial advice at older ages' — https://www.sciencedirect.com/science/article/pii/S2212828X21000220
'Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?' — https://academic.oup.com/qje/article-abstract/126/1/373/1901343?redirectedFrom=fulltext
'(Over)insuring Modest Risks’ — https://www.jstor.org/stable/25760237
'The Mismatch Between Life Insurance Holdings and Financial Vulnerabilities: Evidence from the Health and Retirement Study' — https://www.aeaweb.org/articles?id=10.1257/000282803321455340
'Saving and Life Insurance Holdings at Boston University - A Unique Case Study' — https://www.jstor.org/stable/23877728
'Who is internationally diversified? Evidence from the 401(k) plans of 296 firms' — https://www.sciencedirect.com/science/article/abs/pii/S0304405X16302483?via%3Dihub
'Is conflicted investment advice better than no advice?' — https://www.sciencedirect.com/science/article/abs/pii/S0304405X20301537
'How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice?' — https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12231
'Financial Advice and Individual Investor Portfolio Performance' — https://www.jstor.org/stable/41493871
'Financial advisors: A case of babysitters?' — https://www.sciencedirect.com/science/article/abs/pii/S0378426611002548
'Professional financial advice, self-control and saving behavior' — https://onlinelibrary.wiley.com/doi/10.1111/ijcs.12480
'Do contracts influence comprehensive financial advice?' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1429807
'The Value of Financial Advice' — https://www.forbes.com/sites/wadepfau/2015/07/21/the-value-of-financial-advice/?sh=6b13feda1333
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