Do Seemingly Smarter Consumers Get Better Advice?
Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)
CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute
February 26, 2015
Max Planck Institute for Social Law and Social Policy Discussion Paper No. 01-2015
In this paper, we study the interaction between financial advisors and customers with a potential conflict of interest. We show in a simple analytical framework that advisors have an incentive to provide better advice to consumers who appear to be better informed. From this, we derive an identification strategy to infer the quality of advice received from variables observed in a representative survey of German consumers. Our identification strategy makes use of the fact that we observe both a generally observable signal of a customer's financial literacy as well as an objective measure, which is not observed by the advisor. We apply this strategy to three different empirical settings. In each of these settings, we find consistent evidence that consumers with worse signals of financial literacy on average receive worse financial advice. In particular, both women and individuals without tertiary education are negatively affected.
Number of Pages in PDF File: 48
Keywords: financial advice, investment decisions, consumer protection, household finance
JEL Classification: G02, E02, D08
Date posted: March 4, 2015 ; Last revised: March 5, 2015