Abstract

Households invest heavily in actively managed mutual funds and rely on financial advisors. Nonetheless, these funds and advised portfolios consistently underperform passive benchmarks. To account for this evidence, we introduce non-alpha services in the Berk and Green (2004) model. We find that, in equilibrium,  the higher the value of non-alpha services, the more negative the net alpha. We empirically test the relevance of non-alpha services, analyzing the revenues of over 2,000 financial advisors over 13 years. Client alphas and advisor investment skills show a weak association with advisor revenues. Financial planning---as proxied by the number of accounts per client---is the major driver of advisor revenues.