The Influence of Financial Advice on the Asset Allocation of Individual Investors
33 Pages Posted: 17 Mar 2008
Date Written: January 2008
Many private investors trust in the investment recommendations of professional financial advisors. This study investigates the influence of financial advice on the suitability of asset allocation based on the risk preferences of individual investors. We draw on a unique dataset from a large German retail bank that combines customer and advisor attributes with internal records of customer portfolios. We find strong evidence that financial advisors have an incentive to promote equity-concentrated asset allocations that are not commensurate with investor risk preferences. Moreover, we find that a lack of insight into customers' risk aversion aggravates the unsuitability of the asset allocation. We conclude that there might be a need for enhanced regulative investor protection.
Keywords: individual investors, financial advice, asset allocation, conflict of interest, incentives
JEL Classification: G11, D12
Suggested Citation: Suggested Citation