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How to Avoid Another Crisis? Better Financial Advice

Monday, 30 Apr 2012 | 8:44 AM ET

The credit crisis was partly caused by poor financial advice, and more genuinely independent financial advisers could help avert another crisis, according to renowned economist Robert Shiller.

LWA | Riser | Getty Images

“We have a lack of dedicated financial advisers,” he told CNBC’s “Squawk Box Europe” on Monday.

The Yale economics professor who helped devise the Case-Shiller index for housing market trends compared the current situation – where many advisers receive commission on financial products they recommend – to going to a physician and getting medical advice from a salesman for a drug company.

He said that people investing for themselves “should have professionals dedicated to the client” who don’t take commissions.

Shiller famously called the dotcom bubble of the early 2000s and the housing market bubble later in the decade – both of which led to the erosion of many Americans’ personal finances.

“This crisis was substantially caused by people not being so enlightened, getting too much in debt buying a big house and then getting into a leveraged position and undiversified,” Shiller said.

Shiller: US House Prices Hit by Weak Labour Market, Gas Prices
Robert Shiller, Yale University professor of economics and co-founder of the Case-Shiller index, told CNBC, "Home prices are very different from stock prices, they show a lot of momentum and once things start down they can go down for five years or ten years so I think it is a dismal time for the Spanish housing market."

“I don’t know if all advisers would have warned against that but I think there’s a basic commonsense which would have come through better if people had better financial advice.”

He admitted that even the best financial advisers are “subject to the same zeitgeist” as others, so could be fooled by investment “bubbles”.

Investors have made a cautious return to the stock markets after hefty losses in the second half of last year, prompted by a round of better-than expected earnings figures.

“We’ve seen a big surge in earnings coming out of this recession, but that surge is so sharp and so dramatic that it’s not trustworthy,” Shiller warned.

“If you trust the historical performance of the stock market, it still will give a return of about 4 percent when it’s this high. Compared with alternatives, that looks all right. But it’s still risky. I wouldn’t go overboard with it now,” he said.

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