The Market for Financial Advice: An Audit Study

34 Pages Posted: 25 Mar 2012 Last revised: 27 Mar 2012

See all articles by Sendhil Mullainathan

Sendhil Mullainathan

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Markus Noeth

University of Hamburg

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: March 2012

Abstract

Do financial advisers undo or reinforce the behavioral biases and misconceptions of their clients? We use an audit methodology where trained auditors meet with financial advisers and present different types of portfolios. These portfolios reflect either biases that are in line with the financial interests of the advisers (e.g., returns-chasing portfolio) or run counter to their interests (e.g., a portfolio with company stock or very low-fee index funds). We document that advisers fail to de-bias their clients and often reinforce biases that are in their interests. Advisers encourage returns-chasing behavior and push for actively managed funds that have higher fees, even if the client starts with a well-diversified, low-fee portfolio.

Suggested Citation

Mullainathan, Sendhil and Noeth, Markus and Schoar, Antoinette, The Market for Financial Advice: An Audit Study (March 2012). NBER Working Paper No. w17929. Available at SSRN: https://ssrn.com/abstract=2028263

Sendhil Mullainathan (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-2720 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER) ( email )

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617-588-1473 (Phone)
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Markus Noeth

University of Hamburg ( email )

Chair of Banking and Behavioral Finance
WiSo
Hamburg, 20146
Germany
+49-40-42838 3337 (Phone)
+49-40-42838 5512 (Fax)

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 Memorial Drive, E52-447
Cambridge, MA 02142
United States
617-253-3763 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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