Undercover Study Finds That Financial Advisers Put Profits Ahead Of Their Clients

Former Goldman Sachs trader Greg Smith publicly resigned three weeks ago, decrying the firm’s “toxic and destructive” culture in a scathing New York Times editorial. But it isn’t just traders at America’s biggest investment bank that view their clients as “muppets,” at least according to a new study from the National Bureau of Economic Research.

In 2008, the authors conducted an undercover study in which trained actors made more than 300 visits to financial advisers available to the general public through banks, brokerages, and investment advisory firms. The results: “Financial advisers not only fail to curb investors’ worst habits, they actually tend to reinforce them — especially when those habits generate fees for the advisers,” as SmartMoney reports:

So, when the actors came into these offices, what happened? Basically, the advisers advised the dummy clients to do a whole lot of things that were in the advisers’ interests, while making some adjustments based on just how much they thought the clients could be persuaded to do.

Most strikingly, the advisers nudged people in low-cost index funds toward high-fee actively managed funds — blatantly making their clients worse off.

The researchers used an array of portfolios with differing strategies and degrees of risk in the study, but found that financial advisers recommended a change in strategy — often toward “active management” that increased their fees or commissions — 85 percent of the time. And when advisers did mention fees, they “downplayed them without lying,” the authors of the study found.


Even worse, those without knowledge of financial advising and their own portfolios aren’t aware of how bad the service can be. Despite the study’s findings, the actors were willing to return to 70 percent of the advisers.