How do the typical portfolio and performance of self-directed investors differ from those of investors who employ financial advisors? Do financial advisors systematically add value by providing information to, and tempering the irrationalities of, individual investors? In his March 2008 paper entitled “The Influence of Financial Advice on Individual Investor Portfolio Performance”, Marc Kramer compares the investment portfolio content and performance of advised and self directed investors in the Netherlands. Using portfolio data for a diverse mix of 15,675 individual Dutch investors over the 52-month period from April 2003 to August 2007, he concludes that:
- The sample period is bullish for equities, with the average monthly return of the local stock market 1.6% above the risk-free rate. Small caps beat large caps, and value stocks beat growth stocks. The average portfolio value in the overall sample doubles.
- 67% (27%) of all investors in the sample are advised (self directed) during the entire sample period.
- The average self-directed investor outperforms the average advised investor by a substantial raw net margin of 0.22% per month.
- The portfolios of self-directed investors are on average riskier, 70% equity and 22% bonds, compared to 50% equity and 42% bonds for advised investors. (See the chart below.)
- On a risk-adjusted basis, self-directed and advised investors perform about the same, with both groups on average achieving alphas that are slightly positive but not statistically different from zero.
- After accounting for differences in risk, demographic and trading characteristics, self-directed investors outperform advised investors by a small margin.
- It is difficult to distinguish cause and effect among various investor characteristics, portfolio selection/performance and use of a financial advisor.
The following chart, taken from the paper, depicts the average asset mixes of self-directed and advised investors based on equal weighting of individual portfolios. Both groups concentrate on stocks and bonds, but self-directed investors choose riskier stock-bond allocations (70%-22%) compared to advised investors (50%-42%). Turbos are leveraged, derivative-like investments.
It seems that advised investors in this sample might well outperform self-directed investors on a raw basis during bearish periods.
In summary, on a risk-adjusted basis, diverse groups of self-directed and advised investors perform about the same, with alphas close to zero.
