There is no evidence that professional financial consultants’ advice actually adds value to clients, according to an Oxford University study, noting that the combined amount spent on such advice is as much as $2.5 billion a year.
The research paper, entitled "Picking Winners? Investment Consultants’ Recommendations of Fund Managers," looked at 29 consultancy firms that operated 90 percent of the U.S. advisory market from 1999 to 2011 and discovered that U.S. equity funds recommended by consultants underperformed compared to non-recommended funds by 1.1 percent a year.
In 2011 alone, the firms advised on more than $38 trillion of assets worldwide, with $13 trillion of that coming from U.S. institutional funds.
The research, conducted by the university's Said Business School and released earlier this month, looked at 13 years of survey data, focusing on three questions in particular: what drove consultants’ recommendations; whether capital flows were affected by consultants’ recommendations; and whether these recommendations could predict a fund’s performance.
It was found that some of the recommendations were based on historical performances of the fund products but most of the information provided to clients was based on so-called soft investment factors and service factors. Soft investment factors consist of incalculable elements such as consistent investment philosophy, which stood out in the consultants’ recommendations as a primary factor in the advice.
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Despite this, the data confirms that the recommendations were highly influential, generating large fees for the consultancy firms. Researchers speculated that investors relied on the consultants because they wanted a “hand-holding service" or a “shield” to defend their decisions or that they were “simply unaware how accurate or inaccurate” consultants’ decisions were.