Are financial advisors worth the money?

Financial advisors promise to be your investing guide, helping to make your money grow while keeping it -- and you -- out of harm's way.

But a new study finds that advisors often do neither. Instead, they push customers to take risks without a custom-made portfolio. And their clients ended up paying the price.

The study, published last month as a working paper for the National Bureau of Economic Research, analyzed the impact of financial advisors on families in Canada. The researchers took a deep look into how advisors shaped their clients' portfolios and if those investments succeeded.

The researchers found that when people used advisors, they were more likely to take on portfolio risk. Often, that's because people who use advisors are generally wealthier, and can afford to take greater chances with their cash in hopes of richer returns. But advisors also make people feel less anxious about taking risk and weathering market uncertainty.

The researchers looked closely at the portfolios held by clients of financial advisors, and analyzed transaction records for about 800,000 clients using data from four large Canadian banks.

One finding popped out: Rather than tailoring investments to people's individual financial needs and circumstances, advisors tended to build similar portfolios for all of their customers. "We find that advisors may project their own preferences and beliefs onto their clients," the study authors wrote.

The researchers got a look at the portfolios of many of the advisors themselves, and saw that their own risk-taking and bias toward domestic stocks were a strong predictor of their clients' risk-taking and domestic bias. "The picture that emerges here is that no matter what a client looks like, the advisor views the client as sharing his preferences and beliefs," the researchers wrote.

This all makes a certain level of sense. Investors hire advisors specifically for their knowledge and guidance, so it is no surprise that many advisors put them into their favorite stocks and bonds. The big benefit here, of course, is supposed to be the payoff. Does an advisor make money for their clients?

The researchers looked at how the cost of having an advisor stacked up against the investment performance and found that the average client paid a fee of nearly 2.7 percent of assets. Those include all management fees and front-end commissions paid at the initial purchase of an investment. That's about 1.7 percent more than the fees paid for life-cycle funds, which are those autopilot funds that get automatically adjusted without the help of an advisor.

Those extra fees don't bring much in way of returns. The researchers estimated that investors gain around a 1.8 percent return each year from using an advisor. But they're paying that 1.7 percent more for that advisor, therefore giving up nearly all of the return. "Advisors do not add value through market timing or fund selection," the researchers said.

But the paper doesn't bash advisors completely. The researchers said advisors may still add value for investors because they can help with broader financial planning. They could help clients set and meet retirement savings goals, for example, or give advice on tax-efficient investing strategies. They also help reduce anxiety for clients with a tendency to panic during market turmoil.

  • Kim Peterson

    Kim Peterson is a financial journalist covering business and the economy. She has written for several online and print publications, including MSN Money and The Seattle Times.