The study revealed that only 7% of the surveyed advisors recommended index funds, low-cost investment vehicles that minimize the advisor’s profit, despite the fact that research has consistently shown index funds outperform their more expensive counterparts. Half recommended costlier funds that are actively managed by an advisor and thus charge higher fees.
"Overall our findings suggest that the market for advice works very imperfectly. The advice by and large fails to de?bias clients and if anything may exaggerate existing biases or, in some cases, even makes the clients worse off," publishers of the report commented.
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"Moreover, individual biases can have first?order implications for aggregate capital flows and pricing of risk, if there is not enough informed capital to exploit arbitrage opportunities against capital flows from "biased" retail investors," they opinined.
"It is very hard, if not impossible, to justify the active management for most individual, taxable investors, if their goal is to grow wealth," wrote Mark Kritzman, president and chief executive of Windham Capital Management of Boston, in a 2009 study that compared the index funds to actively-managed investments.
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