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Retail Financial Advice: Does One Size Fit All?

55 Pages Posted: 12 Nov 2014 Last revised: 12 Dec 2015

Stephen R. Foerster

University of Western Ontario - Richard Ivey School of Business

Juhani T. Linnainmaa

USC Marshall School of Business; National Bureau of Economic Research (NBER)

Brian Melzer

Northwestern University - Kellogg School of Management - Department of Finance

Alessandro Previtero

Indiana University - Kelley School of Business - Department of Finance

Date Written: July 2, 2015

Abstract

Using unique data on Canadian households, we show that financial advisors exert substantial influence over their clients' asset allocation, but provide limited customization. Advisor fixed effects explain considerably more variation in portfolio risk and home bias than a broad set of investor attributes that includes risk tolerance, stage in the lifecycle and financial sophistication. Advisor effects retain their importance even when controlling flexibly for unobserved heterogeneity through investor fixed effects. An advisor's own asset allocation strongly predicts the allocations chosen on clients' behalf. This one-size-fits-all advice does not come cheap. Advised portfolios cost 2.6% per year, or 1.6% more than lifecycle funds.

Suggested Citation

Foerster , Stephen R. and Linnainmaa, Juhani T. and Melzer, Brian and Previtero, Alessandro, Retail Financial Advice: Does One Size Fit All? (July 2, 2015). Journal of Finance, Forthcoming; Fama-Miller Working Paper; Chicago Booth Research Paper No. 14-38. Available at SSRN: https://ssrn.com/abstract=2522934 or http://dx.doi.org/10.2139/ssrn.2522934

Stephen Foerster

University of Western Ontario - Richard Ivey School of Business ( email )

1255 Western Road
London, Ontario N6G 0N1
Canada
519-661-3726 (Phone)
519-661-3485 (Fax)

Juhani Linnainmaa (Contact Author)

USC Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Brian Melzer

Northwestern University - Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

Alessandro Previtero

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
+1 (512) 581-5420 (Phone)

HOME PAGE: http://aleprevitero.com

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