Out-of-Pocket vs. Out-of-Investment in Financial Advisory Fees: Evidence from the Lab
29 Pages Posted: 30 Oct 2017 Last revised: 21 Aug 2018
Date Written: March 20, 2018
The implications of the method of payment to financial advisors on the behavior of individuals and their willingness to pay (WTP) are of interest to economists and regulators around the globe. This paper uses an experimental economics technique to compare two alternative payment structures. The first “out-of-pocket” payment structure (payment from a checking account) and the second is “out-of-investment” one (payment from an investment portfolio account). We document that for the same financial advice, the subjects in the “out-of-pocket” treatment – a payment framed in terms of losses – were willing to pay on average 25 per cent less than the subjects in the “out-of-investment” treatment – a payment framed in terms of gains. These results hold after controlling for a vector of personal, demographic, and behavioral characteristics, as well as for performance on a math test.
Keywords: experimental public choice, payment method, advisor remuneration, willingness to pay, prospect theory
JEL Classification: G40, G28
Suggested Citation: Suggested Citation