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:

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.