Financial Advisors: A Case of Babysitters?

Abstract

We use two administrative data sets, from a large internet broker and from a major commercial bank, together with regional data to ask three questions: (i) whether financial advisors tend to be matched with poorer, uninformed investors or with richer, experienced but presumably busy investors; (ii) how accounts run without financial advice actually perform relative to those run with advice; (iii) whether the contribution of advisors is similar across advisory models - independent (IFA) versus bank financial advisors (BFA). Controlling for investors’ characteristics and for the possibility that unobserved factors contribute both to the use of IFAs and to account performance, advised accounts offer on average lower raw and abnormal returns and higher diversifiable risk. Higher trading costs contribute to return outcomes, as advised accounts feature more frequent trading and higher portfolio turnover. Robustness analysis suggests that the negative role of advisors is not sensitive to the choice of asset pricing model, and applies with similar or stronger force to BFAs, consistent with greater limitations faced by them on recommended products and nature of advice.

Keywords: financial advice, portfolio choice, household finance

JEL Classification: G1, E2, D8