Costly Financial Advice: Conflicts of Interest or Misguided Beliefs?∗

Using detailed data on financial advisors and their clients, we show that conflicts of interest matter, but appear limited to a small fraction of advisors. These advisors execute trades that increase their commissions and impose costs on the mutual fund system. At the same time, most advisors invest their personal portfolios just like they advise their clients. They trade frequently, chase returns, and prefer expensive, actively managed funds over cheap index funds. Differences in advisors ’ beliefs affect not only their own investment choices, but also cause substantial variation in the quality and cost of advice they give to clients. Our estimates suggest that correcting advisors ’ misguided beliefs, through screening or education, may reduce the cost of advice more than policies aimed at eliminating conflicts of interest