Investing? Beware Consultants, They Will Cost You

The 2015 Commonfund prize has just been granted to an academic paper that concludes:

• we find no evidence that [consultants']... recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless
• the portfolio of all products recommended by investment consultants delivered average returns net of management fees of 6.31% per year (7.13% before fees). These returns are, on average 1.12% lower than the returns obtained by other products available to plan sponsors, which are not recommended by consultants.
• Consultants face a conflict of interest, as arguably they have a vested interest in complexity. Proposing an active US equity strategy, which involves more due diligence, complexity, monitoring, switching and therefore more consultancy work, drives up consulting revenues in comparison to simple cheap solutions.
• investment consultants themselves are shy of disclosing the sort of information which would allow plan sponsors, or any outsider, to measure their own performance.

Moral of the story: when making any investment based on the recommendation of another, always look at the vested interest of the person(s) making the recommendation--usually the conflict of interest is obvious, but in other cases, you have to dig deeper.

Hat Tip: Investing: Nobody knows anything | The Economist


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