Is Financial Advice Trapping Investors in Underperforming Funds?

“Is financial advice itself part of the problem - do advisers’ conflicts of interest perpetuate investor loyalty to poor funds?”

Introduction

Financial advice is meant to be the antidote to irrational investing - the steady hand that protects clients from behavioural errors and market noise.

Yet, paradoxically, the UK’s advice industry often sustains precisely the inefficiencies it claims to correct.Despite decades of regulatory reform, billions of pounds remain trapped in underperforming funds and high-fee products.

Conflicts of Interest in Financial Advice Impacting Investor Outcomes.pdf

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This essay argues that financial advice is indeed part of the problem, because structural conflicts of interest - economic, cognitive, and relational - systematically bias advisers toward preserving relationships rather than maximising client outcomes. 

While not universal or malicious, these conflicts perpetuate investor loyalty to poor funds by rewarding inertia, discouraging transparency, and conflating reassurance with

performance.

1. The Promise of Advice

The rationale for financial advice is grounded in the theory of bounded rationality (Simon, 1957): investors face complexity, limited information, and emotional biases; professional advisers should supply expertise, discipline, and fiduciary stewardship.

In principle, this should reduce behavioural inefficiencies. Empirical studies (e.g., Vanguard, 2022) estimate that good advice adds around 3% in net annual “behavioural alpha” - through asset allocation, tax efficiency, and behavioural coaching.

However, this presumes advice is impartial. In reality, the adviser–client relationship is rarely a pure fiduciary contract; it is a commercial one, shaped by incentives, remuneration, and marketing ecosystems. Where alignment falters, trust becomes a double-edged sword.

2. The Anatomy of Conflict

Conflicts of interest in financial advice occur when the adviser’s income or incentives diverge from the client’s best interests. Three primary forms dominate the UK landscape:

1. Economic conflicts: Before the Retail Distribution Review (RDR, 2013), advisers received commissions from fund providers. Though commissions were banned, indirect incentives persist through vertically integrated models, platform fees, and in-house products.

   
   

2. Cognitive conflicts: Advisers, like clients, suffer confirmation and status quo bias. They are more likely to recommend familiar funds or those that performed well recently, even if evidence shows persistent underperformance.

   
   

3. Relational conflicts: The commercial imperative to maintain trust discourages advisers from recommending disruptive changes, such as switching clients from high-fee legacy funds.

   
   

These conflicts don’t always produce malice; they produce mediocrity. Advice becomes a service of reassurance, not optimisation.

3. Evidence of Persistent Underperformance

The Financial Conduct Authority (FCA) has repeatedly highlighted poor value in advised portfolios. Its Asset Management Market Study (2017) found that many active funds sold through advisers failed to outperform passive equivalents after fees.

Yet client attrition remained low, particularly within large advice networks like St. James’s Place (SJP), whose funds have often underperformed benchmarks while retaining vast inflows due to adviser loyalty and brand power.

The Consumer Duty (2023) now requires advisers to demonstrate “value for money,” yet enforcement remains light. The inertia persists because both advisers and clients equate activity with care.

In behavioural terms, this is authority bias meets trust inertia - clients defer to perceived expertise, while advisers prioritise relationship maintenance over portfolio surgery.

4. The Psychology of Reassurance

Financial advice trades as much in emotion as in expertise.Clients value reassurance - “someone watching over my money” - often more than performance metrics. Advisers, aware of this, frame advice to maximise comfort.

Behavioural finance calls this affect bias: people judge competence by warmth, not evidence. The more empathetic the adviser, the less likely clients are to scrutinise returns.

In this context, poor-performing funds survive because advisers act as narrative shields, reframing losses as temporary, discipline as patience, and volatility as virtue.

The result is a trust trap: clients stay loyal because they feel cared for, not because they are well served.

5. Institutional Capture and Vertical Integration

The UK advice market is dominated by vertically integrated giants — SJP, Quilter, and abrdn - combining advice, platform, and fund management. Advisers within such groups are incentivised, subtly or directly, to allocate to in-house funds.

A 2022 study by Boring Money found that vertically integrated advisers allocate up to 80% of client assets to proprietary products, despite many underperforming cheaper external alternatives. The adviser’s role thus shifts from impartial broker to brand ambassador.

This is institutional capture disguised as convenience.The structural design of the industry turns advice into a distribution channel - preserving poor funds through a network of trust rather than performance.

6. Behavioural and Economic Reinforcement

Two forces reinforce this ecosystem:

1. Switching costs: Clients rarely move advisers. Personal rapport, paperwork friction, and emotional comfort deter mobility. Advisers know this and have little economic incentive to recommend radical changes.

   
   

2. Framing of fees: Adviser fees are often expressed as percentages (“1% ongoing advice fee”) rather than absolute costs. This framing hides compounding drag and reduces perceived pain — a behavioural anaesthetic for underperformance.

Thus, even informed investors tolerate weak results because the cost of confrontation exceeds the perceived cost of mediocrity.

7. Counterarguments: Advice as a Necessary Imperfection

Not all advice is conflicted.For many investors, professional guidance - even if imperfect - delivers superior outcomes to self-directed investing, where panic and neglect are rampant.

The Vanguard Adviser’s Alpha framework demonstrates that investors with advisers are less likely to abandon equity markets during downturns.

Moreover, advisers operate within regulatory and reputational constraints. Many genuinely act in clients’ best interests and achieve strong outcomes.

The problem lies not in individual ethics but in systemic misalignment: the structure of pay, product, and trust encourages comfort over competition.

8. Reforming the Relationship

To mitigate adviser-driven loyalty to poor funds, reform must be structural, not moralistic.Three solutions stand out:

1. Transparent benchmarking: Mandatory client reports comparing actual portfolio returns against risk-adjusted passive equivalents.

   
   

2. Independent fiduciary certification: Separate professional status for fee-only, product-neutral advisers, akin to U.S. Registered Investment Advisers (RIAs).

   
   

3. Technology and AI oversight: Algorithmic dashboards (like GIP’s model portfolio tools) allowing clients to verify adviser decisions in real time against objective data.

The goal is not to replace trust but to verify it.

Conclusion

Financial advice remains indispensable - but conflicted.By embedding economic, cognitive, and relational incentives that reward inertia, the industry inadvertently perpetuates investor loyalty to poor funds. Advisers act as stabilisers in volatile markets but also as shields for underperformance.

The solution is not to demonise advice, but to realign it: reward outcomes, not reassurance; transparency, not theatre.Until then, financial advice will continue to be both the cure and the cause - the comfort that costs.

Disclaimer: This article is for educational and informational purposes only and does not constitute financial advice. Past performance is not a reliable indicator of future results. Investors should conduct their own research or seek independent, regulated advice before making any investment decisions.

Alpesh Patel OBE

www.campaignforamillion.com