Client Involvement in Expert Advice: Antibiotics in Finance?
44 Pages Posted: 30 May 2018 Last revised: 24 Aug 2018
Date Written: July 23, 2018
We use minutes from 17,000 financial advisory sessions and corresponding client portfolio data to study how active client involvement affects advisor recommendations and portfolio outcomes. We find that advisors confronted with acquiescent clients stick to their standards and recommend expensive but well diversified mutual fund portfolios. However, if clients take an active role in the meetings, advisors deviate markedly from their standards, resulting in poorer portfolio diversification and lower Sharpe ratios. Our findings that advisors cater to client requests parallel the phenomenon of doctors prescribing antibiotics to insistent patients even if inappropriate, and imply that pandering diminishes the quality of advice.
Keywords: Financial Advice, Individual Investors, Client Involvement
JEL Classification: D14, G11, G21
Suggested Citation: Suggested Citation