Home | Faculty and Research | Academic Groups | Finance | Finance Matters

Category: General Finance

For Master of Finance Grads, Five Traits For Career and Life

Rigorous finance training offers five traits that are also useful in everyday life, said MIT Sloan professor Deborah Lucas. The best investors:

  • See the world as it is, rather than as they want it to be.
  • Understand that risk must be managed, and cannot be ignored.
  • Learn from opposing points of view and a variety of perspectives.
  • Look beyond conventional wisdom.
  • Reverse their positions, if proven wrong.

“Looking back, those are the lessons that make me feel so personally lucky for [being] in finance,” Lucas told the 114 graduates of the Master of Finance Class of 2017 at a convocation ceremony in Cambridge, MA, on June 8.

Read the full article here>>

Finance at Sloan – A Note for Prospective Students

Growing up in central China, I always held a deep passion for infrastructure projects. It was the transportation and telecommunication facilities that allowed me to see and to continuously explore the unknown world. This motivated me to study Civil Engineering during my undergraduate and graduate studies and to join a construction firm afterwards.

With experience, I realized that even the best engineering knowledge was not enough to get projects done. Bridges and roads could not be built with an empty pocket. Therefore, I applied to Sloan with an aim of studying finance.

With very limited finance knowledge, I started my exploration at Sloan. I joined the Finance Track because I did not know where and how to start. The Track provided an effective way to channel my interest in finance and the needed guidance for a finance-novice like me to start off on the right path. The core classes, together with the Track’s required curriculum, provided a strong foundation. Afterwards, the varieties of advanced finance courses such as Corporate Finance and Entrepreneurial Finance allowed me to deepen studies based on my own interests. Meanwhile, student clubs such as Finance Club and Finance & Policy Club, helped me to connect with classmates with similar interests and to broaden my networks in relevant industry. MIT Golub Center for Finance and Policy provided a platform for me to research the impact of government regulations on financial institutions.

Through the two years of study, what I learned went far deeper than the discount cash model and the basics. I had the opportunity to learn about various applications of finance theories such as the valuations in M&As and start-ups. Most importantly, I got to know the history of modern finance at Sloan. The birth place of modern finance, MIT Sloan is home to many finance legacy theories such as Black-Scholes-Merton Option Pricing Model and Modigliani-Miller (MM) Theorems.

If you’re interested in learning more, please join us on May 13th at the Focus on Finance Symposium.  This link will give you more details about the event and a registration form.

Look forward to seeing you at Sloan!

Weiyuan (Wendy) Yuwen is an MBA Candidate in the MIT Sloan School of Management Class of 2017. She is involved in Finance&Policy Club, Finance Club, Sloan Board Fellowship and Graduate Student Leadership Fellowship. Prior to Sloan, Wendy worked as a civil engineer and pursues a career in infrastructure investment to serve developing communities.

We Put Financial Advisers to the Test–and They Failed

From The Wall Street Journal

The world we live in asks us to make an abundance of financial decisions every day. These range from the inane, such as whether to risk a parking ticket when you stop for one minute to drop off your dry-cleaning; to the highly complex, such as which funds and investment products to pick for your retirement savings.

All of these decisions require risk-return tradeoffs. Unfortunately, while people have many opportunities in life to perfect their strategy concerning parking tickets, the same is not true for the complex and all-important decisions of how to invest retirement savings. By the time you learn whether a retirement strategy was the right choice, it is usually too late to change it.

Not surprisingly then, much research shows that a large fraction of the population is poorly prepared to make these financial decisions by themselves. Typically, when faced with complex and important decisions we rely on trusted experts for advice. Sick people turn to doctors, those accused of crimes seek the help of lawyers, and the list goes on. These cases all have a common feature: The expert adviser must abide by a strict code of conduct that puts the interest of the client first.

Surprisingly, the same is not always true for financial experts who advise people on their retirement savings. A majority of these professionals are not registered as financial advisers who have a fiduciary responsibility to their clients, which means putting their clients’ interest first. Instead, they are registered as brokers who only adhere to what is known as a “suitability” standard, which is much vaguer and only asks brokers to make recommendations that are consistent with the client’s interest.

In addition, the majority of brokers are not paid on the basis of the quality of their advice, but rather on the fee income they generate from their clients. To resort to a medical analogy, this is equivalent to simply prohibiting doctors from recommending drugs that kill you, while not actually requiring they prescribe the best drugs to cure your disease.

To better align the interest of advisers with their clients the Department of Labor issued rules earlier this year that require any investment professional who advises clients on their individual retirement accounts (rollover IRA) to act as fiduciaries, meaning they have to put their clients’ interests before their own. The new DOL rules only come into effect next year, but the industry has been aflutter with debates over these new rules. And there is still a lot of room for brokers who fall outside of the 401(k) and the rollover IRA area. So what should we expect?

In a  study with my co-authors Sendhil Mullainathan at Harvard University and Markus Noeth at Hamburg University, we set out to analyze the quality of financial advice commonly given to clients. We sent “mystery shoppers” to financial advisers in the greater Boston area who impersonated regular customers seeking advice on how to invest their retirement savings outside of their 401(k) plans. The mystery shoppers also represent different levels of bias or misinformation about financial markets. What we learned is highly troubling.By and large, the advice our shoppers received did not correct any of their misconceptions. Even more troubling, the advisers seemed to exaggerate the existing misconceptions of clients if it made it easier to sell more expensive and higher fee products.In addition, advisers strongly favored actively managed funds over index funds. In only 7.5% of sessions did advisers encourage investing in index funds.This is exactly counter to insights from finance research, which suggests that the average investor should choose low-cost index funds over actively managed funds. If advisers did happen to mention fees, they usually downplayed their importance.Of course, no one expects financial advisers to work pro-bono. But what is alarming is that adviser incentives seem to be set in such a way as to move clients away from the existing strategy regardless of its merit, i.e., even when they looked at a low‐fee-diversified portfolio. As a result, we found that advisers appeared willing to make their clients worse off in order to secure financial gain for themselves. This is bad new for savers–including the many baby boomers–seeking to boost their retirement nest egg.But our research also suggests that the proposed fiduciary standard can be beneficial. Indeed, we found that advisers who have a fiduciary responsibility toward their clients provided better and less biased advice than those that were merely registered as brokers. The former were less likely to move people away from index funds and to reinforce erroneous beliefs about the market.There is an important additional benefit to a policy that reduces conflicts of interest between clients and their advisers. It also helps in harnessing the market’s competitive forces to the benefit of consumers rather than to their detriment. As many responsible financial advisers will point out, if retail investors are poorly informed, advisers who provide sound financial advice often find it difficult to compete with less sanguine competitors.So holding financial advisers to higher fiduciary standards is not only good consumer financial protection but is also good market economics.

Read the full post at The Wall Street Journal

Antoinette Schoar is the Michael M. Koerner (1949) Professor of Entrepreneurship and Professor of Finance at the MIT Sloan School of Management.