Financial advisors may be unduly influenced by fees when recommending higher stock allocations to retirement-age clients. Still, their recommendations ultimately reflect a more optimal investment strategy than investors would choose on their own, according to a paper by the Center for Retirement Research at Boston College. The Center examined two surveys by Greenwald Research, one of financial advisors with a large share of retirement-age clients, and one of investors who are at or near retirement age and have over $100,000 in assets outside of defined benefit plans, to arrive at its conclusions.

“Given that advisors do impact some of their clients’ appetite for risk, the natural follow-on question is whether that impact improves their clients’ retirement security,’ the paper’s authors, Jean-Pierre Aubry, associate director of retirement plans and finance at the Center, and research economist Yimeng Yin, wrote. “Two pieces of evidence support the idea that advisor recommendations do, broadly, help.”

Comparing advisor and investor attitudes toward stock allocations shows that advisors tend to have a more rational view of the risk vs. return relationship regarding stocks, the paper notes. Advisors’ stock recommendations also closely follow those used by target date funds, which make their allocations based on established economic and finance theory. In fact, the mean recommendation by advisors in the survey for a baseline investor client matched exactly the one in the Morningstar Lifetime Allocation Index. The mean recommendation for clients with low risk tolerance was 200 basis points lower than the one in the Morningstar Index.

Related:Asset Managers Point to Dangers of ‘Over-Customization’ of Portfolios

Financial advisors recommended a mean stock allocation of 48% for hypothetical baseline retirement clients—a 65-year-old retired couple with a moderate appetite for risk. For retirement clients with a low risk tolerance, they recommended an equity allocation of 30%, while for those with guaranteed lifetime income, the mean recommendation was 44%.

However, a standard deviation of 18% in the stock allocation recommendations for baseline clients signaled that there is a wide variation in recommended allocations. What the study found is that the higher the percentage of the advisors’ compensation that derived from percentage-of-assets fees, the higher the recommended allocation to stocks tended to be. The relationship between this compensation structure and higher recommendation for stock allocations was 0.147, significantly higher than any other factor, including total returns (0.047) and assumed risk premiums of stocks (0.001).

Related:AI Disruption Fear Sparks Investor Scrutiny of Software Stocks

At the same time, the investor survey showed that the mean desired allocation to stocks for baseline investors was 39% and for those with a low tolerance for risk, 29%. Further research revealed that baseline investors’ actual allocations to stocks were more in line with advisor recommendations, at 45%, than with the investors’ own preferences. One-fifth of surveyed investors also self-reported that working with a financial advisor increased their risk tolerance. Another 67% said it had no bearing on their risk appetite, and 13% said their risk tolerance declined.

“The results show that—while advisors do tailor their recommendations to clients’ risk tolerance (but not the composition of their retirement income)—their recommended stock allocations for those with average risk tolerance tend to be higher than what investors with average risk tolerance desire,” the paper concluded. “But, this outcome is likely beneficial for many investors due to the more realistic assessment of risks and returns of advisors (even if potentially motivated by advisors’ desire for larger asset-based fees).”

The advisor survey included responses from 400 advisors with at least three years of experience, $30 million in AUM and 75 clients. At least 40% or more of the advisors’ clients had to be over 50.

Related:Powell Opens Door to Interest Rate Cut, Citing Labor Markets

The retirement survey included responses from 1,016 investors aged 48 to 78 with at least $100,000 in investable assets. The survey deliberately undersampled investors with a defined benefit plan.

The two surveys were administered in mid-2024 and were not linked.