How your adviser's risk aversion can hurt your portfolio
By Mark Hulbert, MarketWatch
Advisers' incentives may make them more conservative than you need them to be
CHAPEL HILL, N.C. (MarketWatch) -- Undisclosed fees and commissions are not the only reasons financial advisers' incentives may not align with their clients'. Advisers have incentives to be more risk-averse than their clients, which can make them more conservative than their clients would otherwise want.
This source of misalignment has too often been overlooked in recent years, given regulators' hyper-focus on adviser compensation (http://www.marketwatch.com/story/what-the-heck-is-reasonable-compensation-anyway-2016-10-12). Take the debate over the so-called Fiduciary Rule: Though it generally would require advisers to put their clients' best interests ahead of their own, almost all discussions about the rule have focused on the requirement that advisers clearly disclose all fees and commissions to their clients.
That's undeniably important, but so too is the question of adviser incentives. Both advisers and investors need to be aware of the issue to insure that it doesn't adversely affect clients' portfolios.
Read: How the fiduciary rule could change your relationship with your adviser (http://www.marketwatch.com/story/how-the-fiduciary-rule-could-change-your-relationship-with-your-adviser-2016-12-09)
I am indebted to Meb Faber, chief investment officer of Cambria Investment Management, for pointing out the ways (http://mebfaber.com/2017/03/22/risky-stock-market-retail-investors-4x-risky-advisors/) in which a typical adviser is vulnerable to a bear market. Notice that only the first of these four sources of risk are also faced by their clients:
-- Losses advisers incur in their personal portfolios