More and more I'm meeting with people who rely on their financial advisors for recommendations of where to invest their money. (Disclosure: I also rely on a financial advisor to manage part of my money)
The question that I ask is what incentive does a financial advisor really have to find and recommend a promising investment opportunity that hasn't been around long enough to present a long track record? For example, research has shown that emerging hedge funds outperform hedge funds with longer track records (http://www.vanthedgepoint.com/vanthedgepoint_news/20070123article.html). However, if an advisor recommends an emerging fund that does not perform well, he would likely be blamed for making a bad recommendation which might result in a loss of a portion of the capital he was managing. On the other hand, if the advisor recommends a well known and more established fund, even if it underperforms, the advisor can always point to the strong historical track record of the fund.
The reason I bring up this issue is not to say that people shouldn't rely on advisors (after all, I still do). However, if an investor does use an advisor to provide feedback on an investment opportunity, they should always keep in mind the position of the advisor and how they might be limited to an answer that may not be a true reflection of the investment opportunity potential.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment