Conflicted advice about portfolio diversification

Authors

  • Sally Shen Global Risk Institute in Financial Services
  • John A. Turner Pension Policy Center

DOI:

https://doi.org/10.61190/fsr.v27i1.3380

Keywords:

Conflicts of interest, Financial advice, Portfolio diversification

Abstract

We investigate the validity of the argument by the financial services industry to “roll over your ‘old’ 401(k) plan” because 401(k)-type plans have a limited number of investment options, while Individual Retirement Accounts (IRAs) have a virtually unlimited number of options. We empirically analyze the diversification of a large 401(k)-type plan with only five basic investment options. Financial advisers with a conflict of interest may use strategic complexity to encourage rollovers, recommending complex portfolios to impress naïve clients who have a weak understanding of the concept of diversification, while not weighing the cost of the complex portfolios against any added benefits of diversification.

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Published

2018-03-30

How to Cite

Shen, S., & Turner, J. A. (2018). Conflicted advice about portfolio diversification. Financial Services Review, 27(1), 47–81. https://doi.org/10.61190/fsr.v27i1.3380

Issue

Vol. 27 No. 1 (2018): Spring 2018

Section

New Original Submission

License

Copyright (c) 2018 Academy of Financial Services

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