“Value of Advice” Claims “Completely Refutable”

Many financial industry participants, particularly the mutual fund industry and the groups that lobby for them (such as the Investment Funds Institute of Canada (IFIC)), love to tout “research” that demonstrates the value of advice.

Often, industry spins the results of studies, drawing very tenuous conclusions that, while unproven, fully support the products and services they sell. These tenuous conclusions, which assume cause and effect that are not necessarily demonstrated by the research, are then marketed to unsuspecting financial consumers as proof that if they receive advice from an “advisor”, they will be better off financially.

The industry’s latest gem is a research paper entitled “Econometric Models on the Value of Advice of a Financial Advisor”, prepared by researchers at the Centre for Interuniversity Research and Analysis on Organizations (CIRANO). As noted in a recent Globe and Mail article by Preet Banerjee, problems arising from the limitations of the studies that have been conducted “are serious and could undermine almost all of the study’s conclusions”.

The CIRANO study was conducted by impartial academics who would have employed proper analytical processes. We do not dispute their findings in any way. However, the industry’s interpretations of the results are very misleading. According to a guide produced and published by IFIC, the study’s results “…demonstrate convincingly that having a financial advisor contributes positively and significantly to the accumulation of financial wealth.” Further, Advocis’ “Special Bulletin” states that “The research demonstrates, with statistical significance, the impact having a financial advisor has on an individual’s assets… Advice is found to contribute significantly to the rate at which households save.” These conclusions are a far cry from the study’s finding of a positive correlation between advice and greater financial assets over time. The distinction is subtle, but very important. Preet’s article discusses several of the limitations of the study in reaching the conclusions that the industry propounds.

Further, and more importantly, Professor Montmarquette, one of the authors of the study, has indicated that the study is “absolutely refutable given the limitations of the data”. As reported by Preet, Professor Montmarqueete would like to see a more formal longitudinal study intimately tracking the performance of advised versus non-advised groups over a long period of time: “We need a better study and a better paper before I would be comfortable with the way [the industry associations] are saying what they are saying.” This speaks volumes to the industry associations’ characterizations of the research.

In FAIR Canada’s view, the closing statement in Advocis’ Special Bulletin speaks directly to the industry’s objective in interpreting the results of the study in the way they have: “CIRANO’s research reinforces the value of advice and the importance of public policies and regulation that doesn’t hinder our members’ growth and prosperity.”

November 29, 2012