To Trust is Good, But to Control is Better: How Investors Discipline Financial Advisors' Activity

51 Pages Posted: 2 Mar 2016 Last revised: 21 Oct 2018

See all articles by Riccardo Calcagno

Riccardo Calcagno

Politecnico di Torino

Maela Giofré

University of Turin - Department of Economics and Statistics; CeRP-CCA; Netspar

Maria Cesira Urzí Brancati

CeRP; JRC-Seville

Date Written: January 31, 2017

Abstract

Using a survey of clients from one of the largest Italian banks, we find that investors with low level of trust in professional advisors seek financial counselling, but make their decisions autonomously. We investigate whether these investors exert some form of control over the quality of the recommendations they receive, and, if so, which one. Half of these investors do not exert any form of control over the advisor's activity. The investors who are more likely to control the quality of the advice received are those with high self-assessed financial competence. The mechanism through which investors discipline advisors depends instead on the investors' degree of test-based financial literacy. Investors with high financial literacy directly monitor the advisors' activity themselves. Instead, investors with low financial literacy are more likely to seek a second expert's opinion that supports the recommendations previously received, such as in the case of credence services. Our findings suggest that improving investors financial knowledge may foster direct control of the advisor's activity. Moreover, facilitating the comparison between financial products by standardizing and centralizing the information may be very effective to protect poorly literate investors.

Keywords: Financial Advice, Financial Literacy, Credence Services

JEL Classification: G11, G24, D80

Suggested Citation

Calcagno, Riccardo and Giofré, Maela and Urzí Brancati, Maria Cesira, To Trust is Good, But to Control is Better: How Investors Discipline Financial Advisors' Activity (January 31, 2017). Journal of Economic Behavior and Organization, Vol. 140, 2017, Available at SSRN: https://ssrn.com/abstract=2740240 or http://dx.doi.org/10.2139/ssrn.2740240

Riccardo Calcagno (Contact Author)

Politecnico di Torino ( email )

Corso Duca degli Abruzzi, 24
Torino, Torino 10129
Italy

Maela Giofré

University of Turin - Department of Economics and Statistics ( email )

Lungo Dora Siena 100/A
Torino, Turin - Piedmont 10153
Italy

CeRP-CCA ( email )

Via Real Collegio 30
Moncalieri (TO), Turin 10024
Italy

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Maria Cesira Urzí Brancati

CeRP ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

JRC-Seville ( email )

Calle inca garcilaso 3
Seville, 41092
Spain

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
72
Abstract Views
635
rank
352,625
PlumX Metrics