In particular, the research paper provides new evidence that:
Advice has a positive and significant impact on financial assets aft er factoring out the influence of close to 50 socio-economic, demographic and attitudinal variables that also affect individual financial assets;
The positive effect of advice on wealth accumulation cannot be explained by asset performance alone: the greater savings discipline acquired through advice plays an important role;
Advice positively impacts retirement readiness, even after factoring out the impact of a myriad of other variables; and
Having advice is an important contributor to levels of trust, satisfaction and confidence in financial advisors—a strong indicator of value.
The paper you quote is low-quality and does not provide ANY evidence to support the claim that “active investment with an advisor is empirically superior to passive non-advised investment for most people.”
As far as I can tell all it shows is that richer people are more likely to have financial advisors.
Um...that’s one of the things they control for. From the introduction:
The studies show dramatically higher investible assets and net worth of advised relative
to non-advised individuals after accounting for age and income level. Average net worth
for advised investors is nearly three to four times greater than that of non-advised
investors, and wide differentials are observed across all age and income levels
Tell me something: what sort of people do you suppose would seek out a financial advisor and take their advice? Do you think all unobserved traits can be completely described & modeled as a single linear weight of ‘income levels’?
Seek out? Fewer than you’d think bother to seek advice. Most people seem to stumble into it. And while this is anecdote and not data, the ones most likely to take my advice are the ones who don’t want to be bothered doing it themselves, far more than any other single trait.
And no, I don’t think all variables can be compensated for. However, I think that a study that tries reasonably hard to do so still does provide evidence, if evidence less convincing than the fluff makes it out to be. But it’s certainly much stronger than “rich people get more advisors”.
the ones most likely to take my advice are the ones who don’t want to be bothered doing it themselves, far more than any other single trait.
Of the people who would look up and carry out the financial advice themselves an the ones who come to an adviser to carry it out, there may be some imbalance in terms of wanting to bother. Both groups are still highly selected compared to the general population: as you say, “Fewer than you’d think bother to seek advice.” The results are entirely explicable by the default of self-selection, and that’s much more plausible than advisors matter all that much. (Consider the example of SAT coaching...)
Give me a practical model for a randomized study, please. Until you have that, let’s work with the evidence we have available. And that evidence seems pretty consistent with my beliefs(that I’ve had since before I started this job) that advisors don’t meaningfully improve investment returns per se, but they mildly improve investor tax planning, and they massively improve investor behaviour.
Self-selection is the default explanation; the onus is on financial planners to show that they are helpful.
Give me a practical model for a randomized study, please.
You could… I don’t know, select some people, offer half of them $1k to go to a financial planner and the others $1k in exchange for reporting on financial health, then see if the experimental group is better off a year later? This is not harder than doing things like deworming studies in Africa.
That’s sort of the point of this whole exercise, yes. Same income, higher wealth with an advisor. It’s pretty tough to control for the exact same thing you’re trying to measure.
You’re arguing inheritances and such, I take it? It’ll have some effect, I’m sure, but I can’t imagine it being as massive as these studies make it out to be(There’s more than one study in this vein, and they’ve all shown the same thing—I just have the others in hardcopy from work, not online).
No. I am arguing that the paper did not examine the selection bias present (the sample wasn’t random at all). I am arguing that the paper avoids talking about the direction of causation and generally about the difference between causation and correlation (for example, financial advisors are much more interested in working with richer people than with poorer people). I am arguing that the paper does not present any longitudinal results. I am arguing that this is an industry-funded paper which would never have seen the light of day if it were unable to find the desired results. I am arguing that that I see no attempt to account for the degrees of freedom in their analysis.
All in all, as I said, it’s a low-quality paper that doesn’t provide any evidence for the claim we’re discussing.
I don’t know of any papers outside of industry that analyze this topic, and certainly none that do so as rigorously as you’re asking for. If you have one, I’m all ears. But in the absence of strong evidence, I’m going to suggest that weak evidence trumps no evidence.
“active investment with an advisor is empirically superior to passive non-advised investment for most people.” Can you source this?
https://www.ific.ca/wp-content/uploads/2013/08/New-Evidence-on-the-Value-of-Financial-Advice-November-2012.pdf/1653/
In particular, the research paper provides new evidence that:
Advice has a positive and significant impact on financial assets aft er factoring out the influence of close to 50 socio-economic, demographic and attitudinal variables that also affect individual financial assets;
The positive effect of advice on wealth accumulation cannot be explained by asset performance alone: the greater savings discipline acquired through advice plays an important role;
Advice positively impacts retirement readiness, even after factoring out the impact of a myriad of other variables; and
Having advice is an important contributor to levels of trust, satisfaction and confidence in financial advisors—a strong indicator of value.
The paper you quote is low-quality and does not provide ANY evidence to support the claim that “active investment with an advisor is empirically superior to passive non-advised investment for most people.”
As far as I can tell all it shows is that richer people are more likely to have financial advisors.
Um...that’s one of the things they control for. From the introduction:
Tell me something: what sort of people do you suppose would seek out a financial advisor and take their advice? Do you think all unobserved traits can be completely described & modeled as a single linear weight of ‘income levels’?
Seek out? Fewer than you’d think bother to seek advice. Most people seem to stumble into it. And while this is anecdote and not data, the ones most likely to take my advice are the ones who don’t want to be bothered doing it themselves, far more than any other single trait.
And no, I don’t think all variables can be compensated for. However, I think that a study that tries reasonably hard to do so still does provide evidence, if evidence less convincing than the fluff makes it out to be. But it’s certainly much stronger than “rich people get more advisors”.
Of the people who would look up and carry out the financial advice themselves an the ones who come to an adviser to carry it out, there may be some imbalance in terms of wanting to bother. Both groups are still highly selected compared to the general population: as you say, “Fewer than you’d think bother to seek advice.” The results are entirely explicable by the default of self-selection, and that’s much more plausible than advisors matter all that much. (Consider the example of SAT coaching...)
Where’s the randomized beef?
Give me a practical model for a randomized study, please. Until you have that, let’s work with the evidence we have available. And that evidence seems pretty consistent with my beliefs(that I’ve had since before I started this job) that advisors don’t meaningfully improve investment returns per se, but they mildly improve investor tax planning, and they massively improve investor behaviour.
Self-selection is the default explanation; the onus is on financial planners to show that they are helpful.
You could… I don’t know, select some people, offer half of them $1k to go to a financial planner and the others $1k in exchange for reporting on financial health, then see if the experimental group is better off a year later? This is not harder than doing things like deworming studies in Africa.
Income is not wealth.
That’s sort of the point of this whole exercise, yes. Same income, higher wealth with an advisor. It’s pretty tough to control for the exact same thing you’re trying to measure.
You’re arguing inheritances and such, I take it? It’ll have some effect, I’m sure, but I can’t imagine it being as massive as these studies make it out to be(There’s more than one study in this vein, and they’ve all shown the same thing—I just have the others in hardcopy from work, not online).
No. I am arguing that the paper did not examine the selection bias present (the sample wasn’t random at all). I am arguing that the paper avoids talking about the direction of causation and generally about the difference between causation and correlation (for example, financial advisors are much more interested in working with richer people than with poorer people). I am arguing that the paper does not present any longitudinal results. I am arguing that this is an industry-funded paper which would never have seen the light of day if it were unable to find the desired results. I am arguing that that I see no attempt to account for the degrees of freedom in their analysis.
All in all, as I said, it’s a low-quality paper that doesn’t provide any evidence for the claim we’re discussing.
I don’t know of any papers outside of industry that analyze this topic, and certainly none that do so as rigorously as you’re asking for. If you have one, I’m all ears. But in the absence of strong evidence, I’m going to suggest that weak evidence trumps no evidence.