Advisors' equity recommendations often exceed client preferences, study finds

A new analysis from the Center for Retirement Research at Boston College sheds light on how financial advisors shape the equity allocations of clients approaching or in retirement – and whether those recommendations ultimately benefit investors’ long-term security.

Drawing on two national surveys conducted in mid-2024 – one of 400 financial advisors and another of 1,016 retirement investors – the study explores the factors behind advisors’ portfolio recommendations and how those suggestions influence investor behavior.

The new retirement research finds that advisors typically recommend a higher percentage of stocks than what many clients say they want, particularly for those with moderate risk tolerance.

For a hypothetical 65-year-old retired couple with average risk tolerance, advisors suggested an average stock allocation of 48%. By contrast, investors in the same demographic expressed a preference for a 39% allocation. The gap narrows for more risk-averse clients, with both groups converging around a 30% allocation.

Despite the difference between advisor recommendations and client preferences, the study found that actual investor portfolios tend to align more closely with advisor guidance than with investors’ stated desires. According to the research, the average stock allocation held by investors was 45%, nearly mirroring the advisor-recommended level.

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The analysis also examined what drives advisors’ recommendations. Advisors who derive a larger share of their compensation from asset-based fees were more likely to suggest higher equity allocations.

Additionally, those who frequently employ a “total return” strategy – relying on all sources of investment return to fund withdrawals – tended to recommend more stocks. In contrast, advisors emphasizing a “floor” strategy, which prioritizes guaranteed income for essential expenses, leaned toward more conservative allocations.

Interestingly, the study found that neither the advisor’s perception of stock market risk nor their status as an RIA had a significant direct effect on recommended allocations. The research suggests that compensation structure and income strategy play a more substantial role.

The impact of advisor recommendations on investor behavior was also notable. Thirty-three percent of retirement investors who had worked with an advisor reported that the experience changed their appetite for risk. Of those, about three-fifths said their risk tolerance had increased, while the remainder reported a decrease.

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The report concludes that, while advisors’ recommendations may sometimes be influenced by compensation incentives, they are generally in line with asset allocation models used by target date funds.

“Advisors do tailor their recommendations to clients’ risk tolerance…but their recommended stock allocations for those with average risk tolerance tend to be higher than what investors with average risk tolerance desire,” the authors wrote. “But, this outcome is likely beneficial for many investors due to the more realistic assessment of risks and returns of advisors.”

The authors also noted that advisors spend much of their time discussing asset allocation with clients, emphasizing the importance of aligning portfolios with individual risk preferences.

Ultimately, the study suggests that advisors’ influence may help steer clients toward portfolio choices that better reflect long-term market realities, even if those choices differ from initial investor preferences.