What Stock Allocations Do Advisors Recommend And How Does It Impact Their Clients? – Center for Retirement Research

Introduction

Market risk is a crucial consideration for those relying on financial assets as a major source of support in retirement.  Retirement investors often have misperceptions about asset returns and limited knowledge about financial markets, potentially jeopardizing their long-term security.  The role of financial advisors is to guide investors through their asset allocation decisions by helping them align their portfolios with their risk preferences and risk capacities.   

Despite the importance of this advisor-client relationship, the literature remains relatively unsettled regarding the actual impact financial advisors have on households’ portfolio choices.  More specifically, a significant knowledge gap remains regarding advisors’ approach to constructing portfolio recommendations and the extent to which these professionals affect their clients’ views on market risk.  This paper addresses these knowledge gaps by analyzing data from two new surveys of financial advisors and retirement investors.  First, it documents the stock allocation that advisors typically recommend to retirement investors and how those recommendations vary based on client and advisor characteristics.  Then, it explores the extent to which advisors’ recommendations influence clients’ risk appetite in ways that support retirement security.

The paper proceeds as follows.  The first section briefly reviews prior studies on advisors’ role in investors’ portfolio decisions and financial planning.  The second section describes data from the two surveys.  The third section presents results on advisor recommendations and discusses the implications for clients’ retirement security.  The final section concludes that – while advisors do tailor their recommendations to clients’ risk tolerance (but not the composition of their retirement income) – their recommended stock allocations for clients with average risk tolerance tend to be higher than desired by investors.  But, this advice (even if potentially motivated by an advisor’s desire for larger asset-based fees) is likely beneficial for many investors, as it reflects a better assessment of market risks and returns.