Juhani Linnainmaa: Financial Advisors, and the Cross-Section of Returns | Rational Reminder 278

If you dive deep into financial advisor fixed effects, you’ll begin to understand that an advisor's own portfolio has a bigger impact on the portfolios of their clients than the characteristics of the clients themselves. To help us make sense of this and to further explain financial values and the cross-section of returns, we are joined by the influential and notorious Professor of Finance, Juhani Linnainmaa. Our conversation begins with a comprehensive analysis of financial values, including a comparison between the trading patterns of advisors and those of their clients, a disquisition of misguided beliefs, an examination of client characteristics, and the ins and outs of portfolio variation and customizations. Canada recently adopted regulations from the Mutual Fund Dealers Association (MFDA), and we discuss how this has affected the use of financial advice in the country before comparing the benefit of increased equity share to the cost of advice, what hiring a new advisor before a financial crisis may mean for clients, and the role of regulation in the industry. We end with the cross-section of returns by examining accounting-based anomalies pre-1963, how profitability and investment relate to data mining, why a financial firm would switch between growth and value, and finally, Professor Juhani Linnainmaa’s definition of success.
Timestamps:
0:00:00 Intro
0:04:46 How the trading patterns of advisors compares to their clients
0:10:57 How investors can assess the quality of a potential advisor’s beliefs
0:14:10 How the evolution of advised portfolios over the client’s life differs from a lifecycle fund
0:22:48 The explanation behind the high cost of advice in Juhani's sample
0:25:40 How adoption of the Mutual Fund Dealers Association affected the use of financial advice in Canada
0:32:11 Whether or not it is reasonable to assume that financial advice with lower fee products is net beneficial
0:34:05 How getting a new advisor before the financial crisis affected investors’ ability to remain invested
0:42:35 What Juhani found when he looked at accounting-based anomalies like profitability and investment in the pre-1963 period
0:52:43 How the value premium decomposes into firms that changed in size and firms that changed in book value of equity
1:02:41 What Juhani's findings on factor momentum suggest about pursuing momentum as a strategy
1:03:01 Juhani defines success in his life
Links From Today’s Episode:
Juhani Linnainmaa - jlinnainmaa.com/
Juhani Linnainmaa on LinkedIn - / juhani-linnainmaa-8321...
Juhani Linnainmaa on Facebook - / juhani.linnainmaa
Tuck School of Business - www.tuck.dartmouth.edu/
Kepos Capital - www.keposcapital.com/
Chicago Booth School of Business - www.chicagobooth.edu/
National Bureau of Economic Research - www.nber.org/
UCLA Anderson School of Management - www.anderson.ucla.edu/
Aalto University - www.aalto.fi/en
‘The Misguided Beliefs of Financial Advisors’ - papers.ssrn.com/sol3/papers.c...
‘Taking the Battle for Financial Literacy to Where the Eyeballs Are’ - anderson-review.ucla.edu/mill...
‘Retail Financial Advice: Does One Size Fit All?’ - papers.ssrn.com/sol3/papers.c...
Mutual Fund Dealers Association - mfda.ca/
‘Money Doctors’ - scholar.harvard.edu/files/shl...
‘Regulation of Charlatans in High-Skill Professions’ - papers.ssrn.com/sol3/papers.c...
‘The History of the Cross Section of Stock Returns’ - papers.ssrn.com/sol3/papers.c...
Michael Roberts on LinkedIn - / prof-michael-r-roberts
‘Does Academic Research Destroy Stock Return Predictability?’ - papers.ssrn.com/sol3/papers.c...
‘The Value Premium’ - papers.ssrn.com/sol3/papers.c...
Dimensional Fund Advisors - www.dimensional.com/
‘Decomposing Value’ - papers.ssrn.com/sol3/papers.c...
Rational Reminder on iTunes - itunes.apple.com/ca/podcast/t....
Rational Reminder Website - rationalreminder.ca/
Rational Reminder on Instagram - / rationalreminder
Rational Reminder on X - / rationalremind
Rational Reminder on RUclips - / channel
Rational Reminder Email - [e-mail]
Benjamin Felix - www.pwlcapital.com/author/ben...
Benjamin on X - / benjaminwfelix
Benjamin on LinkedIn - / benjaminwfelix
Cameron Passmore - www.pwlcapital.com/profile/ca...
Cameron on X - / cameronpassmore
Cameron on LinkedIn - / cameronpassmore

[@freddiefreeloader1894]

As a fellow Finn I was surprised that you nailed pronouncing his name! 🇫🇮

[@muffemod]

CRUNCHBAR YO! 🍫

[@mmbarbon2955]

I did watch to the end of your podcacsts, and you referenced a podcast with few comments. Took a bit to find it...

[@a.j.4644]

Thanks for this terrifying episode that basically guaranteed I won't seek out a financial advisor. I have to know so much to know if they're doing the right thing for me and my life rather than just matching their own personal portfolio that i will know so much that I don't need an advisor.

[@robinspanier7017]

its not that easy.
the main benefit is that they dont feel like dumping all your stocks after a big crash as you (or the average person of us) is likely to do.
this effect is costing us 2 to 3 pc a year.
but yeah i agree.. i rather have my own index fund and do nothing

[@singranasbonfireofdreams8161]

those last 10 ish minutes were incredibly fascinating

[@robinspanier7017]

the beginning was facinating too!
investing in the same funds as the clients and tending to not distinguish between ones individual needs sounds like a dumb person doing a bad job more then it sounds like a advisor behaving in a way which is based on the best insight we have rn.
clearly telling me that the industry needs to be regulated heavily.
selling a fund with a cost of more then 0.5%? well its illegal, go to jail.
having less then 200 stocks? illegal, go to jail.
portfolio turnover more then 500%? illegal.. maybe not go to jail because who knows i guess.
having the same portfolio for every client or almost no difference?
well .. get fined to hell you idiot.
sounds harsh but its the future of people we are talking about.
imagine a doctor doing random things because he believes that is how it should be done.
the same thing.
one is playing with your life today, the other with your life in the future.

[@Bobventk]

The barrier to entry to being a financial advisor in the US is EXTREMELY low.
We have people in my firm who go from being a teacher (for example) to a fully licensed advisor in charge of tens- hundreds of millions of dollars in a matter of a few months. Many of them literally do not know the difference between a mutual fund and an etf.

[@einsplus1]

So any advisor applying the old heuristic (100 - age = percentage of stocks/equity) would be very different from the average advisor, as his clients would have portfolios depending on age rather than on his own preference for a specific asset class?

[@robinspanier7017]

53:52 this is a strategy i investigate and it holds true for the last 20 years.
but it seems to correlate with the equity premium.
on negative premium decades and before 1900 it is quite the opposite.
maybe times have change due to access of the stock market and costs of trading but idk