Conflicted advice about portfolio diversification
DOI:
https://doi.org/10.61190/fsr.v27i1.3380Keywords:
Conflicts of interest, Financial advice, Portfolio diversificationAbstract
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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