Financial Advice: An Improvement for Worse?
Rotterdam School of Management, Erasmus University (RSM)
June 17, 2013
In this paper, I analyze the role of financial advisors in individual investment decisions and ask whether financial advice is a reliable substitute for individuals' financial literacy. I report two main findings. First, I show that individuals who tend to be financially less sophisticated are more likely to consult professional advisors, which supports the notion that financial advice serves as a substitute for financial literacy. Second, when I analyze the impact of financial advice on portfolio choice, I find that, if anything, use of financial advice does not improve the quality of individuals' investment decisions. For example, I document that advised investors earn lower raw and risk-adjusted returns than self-directed investors, even before deducting advisory fees and transaction costs. Overall, the evidence presented in this study casts doubts on the ability of financial advice to serve as an effective substitute for financial literacy.
Number of Pages in PDF File: 41
Keywords: Financial advice, individual investors, household finance
JEL Classification: D12, D14, D8, D18
Date posted: November 18, 2010 ; Last revised: June 17, 2013