For Financial Consumers, Complex Advice = Weaker Portfolio Performance

Why do so many financial advisors make investing complex, even scary – especially
when data shows that simple is better than complicated, and that advisors who go the 
complex route are making things worse and not better?

Hey, let’s face it. The best investment advice – know your goals, know your risk, look 
for value and opportunity, opt for index funds, and diversify – all fits easily onto one 
sheet of paper (or in this day and age – on one Tweet.)

But financial advisors can’t say that to customers, and that’s hurting financial 
consumers where they live – right in the pocketbook.

In a landmark study from the National Bureau of Academic Research http://
, the data reveals that simple is better when it 
comes to investment management.

This from the study:

Do financial advisers undo or reinforce the behavioral biases and misconceptions of 
their clients? We use an audit methodology where trained auditors meet with financial 
advisers and present different types of portfolios. These portfolios reflect either biases 
that are in line with the financial interests of the advisers (e.g., returns-chasing 
portfolio) or run counter to their interests (e.g., a portfolio with company stock or 
very low-fee index funds). We document that advisers fail to de-bias their clients and 
often reinforce biases that are in their interests. Advisers encourage returns-chasing 
behavior and push for actively managed funds that have higher fees, even if the client 
starts with a well-diversified, low-fee portfolio.

Specific “complicated” (i.e., actively managed and deemed as higher risk) portfolios 
tracked by the NBER, entitled “The Market for Financial Advice: An Audit Study” 
underperformed the S&P 500 by 6.5%

That’s not by coincidence.

“Given the reality that tens of millions of people make very poor financial decisions, 
one might hope that the financial advice industry would “de-bias” its customers in a 
more sensible direction, encourage people to diversify their portfolios through low-
cost index funds,” NBER researchers say. “Instead, the advisors audited in this study 
pushed their customers towards costly, actively-managed funds that happen to generate 
lucrative fees. In gauging advisors’ reactions to consumers’ existing investment 

Advisors just don’t seem to “get it” on how complicating things hurts clients’ 
investment performance. The study notes that 59.4% of financial advisors urged clients 
to change in their current active strategy, but 85.4% advocated getting out of index 
funds and into a more actively managed investment strategy.

Additional research backs up the NBER report. Data from two financial analysts, 
Jason Hsu and Vitali Arnott

from Research Affiliates, applies what the duo call the “new skepticism” to investment 
research - research that offers complicated strategies to simple fund performance 

Rallying around the term “if you torture data long enough, it will confess anything”, 
Hsu and Kalesnik cite investment quant models used by advisors that call for 81 
unique investment “factors” in building equity-based portfolios, when only four factors 
are needed (market risk factor and the value, small-cap, and momentum return factors) 
for the vast majority of investors.)

Additionally, Cam Harvey, former editor of the Journal of Finance, analyzed 315 
similar “investment factors” from top financial and economic journal articles and 
highly regarded working papers. Adjusting for “data-snooping,” Harvey, Liu, and Zhu 
(2014) conclude that only a” handful of the factors in the “financial zoo” are actually 
statistically significant.”

“We will gladly bet a simple blend of market, value, low beta, and momentum 
exposures against anyone’s optimized 81-factor portfolio,” Hsu and Kalesknik 

Unfortunately, way too many investment advisors don’t see it that way – and they’ll 
show you 81, risky, expensive reasons why that is so.

If you’re not sure you’re getting the maximum performance from your financial 
advisor, talk to GuardVest – we’ll set you on the right path and guide you to a more 
beneficial relationship with your advisor. Contact us at
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