Pros Who Make You Poorer

Have you heard of the "BCT" study? It's a study from a couple years back that offered some compelling findings. The study, titled "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry," was undertaken by Daniel Bergstresser of Harvard Business School, John Chalmers of the University of Oregon, and Peter Tufano of Harvard Business School.

The findings suggest that:

  • Those who invested through advisor-sold funds did considerably worse than those who bought no-load funds.
  • Investors in broker-sold funds tended to suffer from poor timing decisions in their purchases, while no-load funds' purchases showed no such patterns.
  • Between 1996 and 2002, the raw returns of equally weighted mutual funds (net of all expenses) were 6.6% for do-it-yourself investors and 2.9% for investors in funds chosen by advisors. (That's a big difference!)
  • One conclusion drawn: "Although investors are ultimately responsible for their own investment choices, these findings question the value being added by investment professionals who sell mutual fund shares through conventional distribution arrangements."

The picture gets a little worse, too. When you take that 2.9% return for the advisor-chosen funds and factor in taxes and inflation, those investors actually lost money -- during a market cycle that left the averages modestly higher.

More interesting results
The study also debunked some other myths about investing with advisors:

  • You may get access to some hard-to-find funds through an advisor, but those funds tended to do worse than those you'd find on your own.
  • Advisors don't tend to find lower-cost alternatives than the no-load funds you can find.
  • In general, advisors don't open doors to funds that will outperform their peers.
  • Advisors seem just as prone to chasing performance and popular trends as other investors.

What to do
So, should you eschew all advisors now, for the rest of your life? Not necessarily. They do serve a good purpose sometimes. When I broke a tooth eating an unpopped kernel of popcorn, I wanted to consult a professional dentist, not a neighbor with a string.

Know that there are different kinds of advisors. Some take commissions from the investments they sell you, and others take a flat fee from you for advising you. It's often preferable to go with a flat-fee advisor recommended by an organization such as NAPFA.

An interesting little detail in the study was that those who invested on their own (and did better) tended to be more educated and savvy than those who relied on advisors. To me, that suggests that if you're a savvy investor who consults an advisor, your results are likely to be different and perhaps better.

Invest smart
The bottom line is that many of us can do very well investing on our own, calling our own shots. That's what we've been saying at The Motley Fool for more than a decade now. You can find plenty of well-known names with strong long-term records. In a decade where the overall market was flat or worse, check out these average annual gains:

Company

10-Year Average Annual Gain

Colgate-Palmolive (NYSE: CL  )

6%

Schwab (Nasdaq: SCHW  )

5%

Best Buy (NYSE: BBY  )

9%

Wal-Mart (NYSE: WMT  )

5%

McDonald's (NYSE: MCD  )

8%

Deere (NYSE: DE  )

12%

Kimberly-Clark (NYSE: KMB  )

3%

Source: Yahoo! Finance.

Of course, not every big name will do well. You need to do research and thinking and diversifying, and you'll still probably end up with a clunker or two. But you'll still likely end up better off if you do the research on your own.

To find exceptional no-load mutual funds, see our Motley Fool Champion Funds newsletter. You can try it free with a 30-day trial.

Longtime Fool contributor Selena Maranjian owns shares of Wal-Mart and McDonald's. Kimberly-Clark is a Motley Fool Income Investor recommendation. Wal-Mart and Best Buy are Motley Fool Inside Value selections. Charles Schwab and Best Buy are Motley Fool Stock Advisor recommendations. The Fool owns shares of Best Buy. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 14, 2008, at 12:53 PM, investmentcafes wrote:

    I Couldn't Agree more with the thesis and Fundamental argument this writer,whom through no Fault of her own,hehehe,Has hit upon one of the basics of Sound investing..Conserving Capital and Making Money.

    I Blogged myself about an ETF.."FAN" when it was recently introduced and after doing some homework found the P/E was high and Expenses seemed a bit high.And sure enough after placing an underperform on it it lost 30% of it's Value..sure the Stocks in it lost 30% but part of my Supposition was based on the Facts that Expenses ,Such as this Blog post indicates,are too High vs the Expected " Outperformance" that Investors in Mutual funds,ETF's..need to Attain vs those same fee's.In order to actually make money the ETF or mutual fund has to outperform the market by an amount higher than the FEE/Costs of those funds/ETF's. to break even,and should the Stocks in the ETF/Mutual fund go down outperformance has to be that much better.

    Therefore many Porfessional's Advise,as Did I, Short the ETF and buy some stocks in it,using the overall expense structure of the ETF and Volatility against any downside of " Buying " A few Stocks in that ETF.

    As the Scenario changes Cover the Short ETF.

    So I Agree that alittle Time doing some Research on fundamentals and Technical analysis vs throwing money into an Mutual fund can over the long term save alot of money when the FEE's,Loads are Calculated IN/OUT of your Investment.

    Nice Job on Reminding " Fools" that the Basics do Matter.!!!

    Happy Trails.

  • Report this Comment On December 14, 2008, at 3:07 PM, nuf2bdangrus wrote:

    As someone who works in the industry, this performance discrepancy will continue to exist until the conflict of compensation for sales is replaced by compensation for performance . I am fortunate enough to work for a company that pays me a salary, thus any income from investment sales is muted, designed to keep conflict of interest from swaying financial advice. But the second part is harder, and that is, the public is largely uninformed, and thus chases performance, to the upside and the downside. Look at the tech and real estate bubbles as proof. When markets are flying, the line forms out the door of willing investors. When they are sinking, the phones are ringing with handwringing investors. IF I have learned anything, it is to do the opposite of what the public is doing, and that';s how you make money. Financial advisors compensated for portfolio performance will take off their commission bias, as well as the "market always goes up" bias, and actually work to earn their money. I see too many people making 3 times what I make in many less hours, simply throwing clients money into mutual funds and annuities. This has to change.

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