Financial Advice and Discretion Limits
41 Pages Posted: 30 Apr 2014 Last revised: 5 Sep 2019
Date Written: September 4, 2019
Biased recommendations from financial advisors often lead to suboptimal portfolios and unnecessary fees. In response, many households have moved to digital platforms, so-called "robo-advisors,'' that provide low-fee financial advice based on the household's observable characteristics. We model the advisor-client relationship and show that limiting an advisor's choice set reduces the negative consequences of biased recommendations. Moreover, our analysis suggests that human advisors may play an important role in financial advice when they possess soft information about the client. The analysis suggests that a hybrid solution consisting of discretion limits (produced by a robo-advisor-like platform) and advisor choice may be optimal.
Keywords: Financial Advice, Delegation, Robo-advisors, FinTech
JEL Classification: G11, G1, G2
Suggested Citation: Suggested Citation