Episode 278: Juhani Linnainmaa: Financial Advisors, and the Cross-Section of Returns

If you dive deep into financial advisor fixed effects, you’ll begin to understand that an advisor's own portfolio has a bigger impact on the portfolios of their clients than the characteristics of the clients themselves. To help us make sense of this and to further explain financial values and the cross-section of returns, we are joined by the influential and notorious Professor of Finance, Juhani Linnainmaa. Our conversation begins with a comprehensive analysis of financial values, including a comparison between the trading patterns of advisors and those of their clients, a disquisition of misguided beliefs, an examination of client characteristics, and the ins and outs of portfolio variation and customizations. Canada recently adopted regulations from the Mutual Fund Dealers Association (MFDA), and we discuss how this has affected the use of financial advice in the country before comparing the benefit of increased equity share to the cost of advice, what hiring a new advisor before a financial crisis may mean for clients, and the role of regulation in the industry. We end with the cross-section of returns by examining accounting-based anomalies pre-1963, how profitability and investment relate to data mining, why a financial firm would switch between growth and value, and finally, Professor Juhani Linnainmaa’s definition of success.     Key Points From This Episode: (0:00:42) A very warm welcome to the influential Professor of Finance, Juhani Linnainmaa.  (0:03:52) Comparing the trading patterns of advisors to those of their clients.  (0:08:45) How regulators can go about addressing misguided beliefs.  (0:11:08) Client characteristics that advisors base portfolio customizations on.  (0:13:22) Whether the variation in a client’s portfolio can be explained by their characteristics.  (0:14:49) Explaining the remaining variation in portfolios.  (0:19:38) Other reasons for the high cost of advising, aside from portfolio customization.  (0:22:03) How the adoption of the MFDA affected the use of financial advice in Canada. (0:26:03)  Comparing the benefit of increased equity share to the cost of advice. (0:31:45) How getting a new advisor before the financial crisis affects ongoing investments. (0:35:46) The role of regulation. (0:37:47) Getting into the cross-section of returns with accounting-based anomalies pre-‘63. (0:40:51) Weather profitability and investment are data-mined factors. (0:44:05) The optimal X-anti mix of factors in a portfolio. (0:46:56) The mechanisms that cause firms to move between growth and value. (0:56:31) Professor Juhani’s definition of success.   Links From Today’s Episode: Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.  Rational Reminder Website — https://rationalreminder.ca/  Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/ Rational Reminder on X — https://twitter.com/RationalRemind Rational Reminder on YouTube — https://www.youtube.com/channel/ Rational Reminder Email — [email protected] Felix — https://www.pwlcapital.com/author/benjamin-felix/  Benjamin on X — https://twitter.com/benjaminwfelix Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/ Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/ Cameron on X — https://twitter.com/CameronPassmore Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/ Juhani Linnainmaa — http://jlinnainmaa.com/  Juhani Linnainmaa on LinkedIn — https://www.linkedin.com/in/juhani-linnainmaa-832134194/  Juhani Linnainmaa on Facebook — https://www.facebook.com/juhani.linnainmaa/  Tuck School of Business — https://www.tuck.dartmouth.edu/   Kepos Capital — https://www.keposcapital.com/  Chicago Booth School of Business — https://www.chicagobooth.edu/  National Bureau of Economic Research — https://www.nber.org/  UCLA Anderson School of Management — https://www.anderson.ucla.edu/  Aalto University — https://www.aalto.fi/en   Mutual Fund Dealers Association — https://mfda.ca/   Michael Roberts on LinkedIn — https://www.linkedin.com/in/prof-michael-r-roberts/