Conflicted Advice About Portfolio Diversification

31 Pages Posted: 28 Nov 2017

Date Written: November 22, 2017

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 IRAs have a virtually unlimited number of options. We empirically analyze the diversification of a large 401(k)-type plan with only five investment options. Financial advisers with a conflict of interest may use strategic complexity to encourage rollovers, recommending complex portfolios to impress naive 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.

Keywords: diversification, financial advice, conflicts of interest

JEL Classification: G2, G4

Suggested Citation

Shen, Sally and Turner, John A., Conflicted Advice About Portfolio Diversification (November 22, 2017). Available at SSRN: https://ssrn.com/abstract=3076150 or http://dx.doi.org/10.2139/ssrn.3076150

Sally Shen (Contact Author)

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

John A. Turner

Pension Policy Center ( email )

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