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

See all articles by Yevgeny Mugerman

Yevgeny Mugerman

Bar Ilan University

Orly Sade

Hebrew University of Jerusalem - Department of Finance

Eyal Winter

Hebrew University of Jerusalem - Department of Economics

Date Written: March 20, 2018

Abstract

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

Mugerman, Yevgeny and Sade, Orly and Winter, Eyal, Out-of-Pocket vs. Out-of-Investment in Financial Advisory Fees: Evidence from the Lab (March 20, 2018). Available at SSRN: https://ssrn.com/abstract=3061020 or http://dx.doi.org/10.2139/ssrn.3061020

Yevgeny Mugerman (Contact Author)

Bar Ilan University ( email )

Ramat Gan
5290002
Israel

Orly Sade

Hebrew University of Jerusalem - Department of Finance ( email )

Mount Scopus
Jerusalem, 91905
Israel
972 2 588 3227 (Phone)

Eyal Winter

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel

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