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Financial Advisors: A Case of Babysitters?

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Abstract

We use two data sets, one from a large brokerage and another from a major bank, to ask: (i) whether financial advisors tend to be matched with poorer, uninformed investors or with richer, experienced but presumably busy investors; (ii) how advised accounts actually perform relative to self-managed accounts; (iii) whether the contribution of independent and bank advisors is similar. We find that advised accounts offer on average lower net returns and inferior risk-return tradeoffs (Sharpe ratios). Trading costs contribute to outcomes, as advised accounts feature higher turnover, consistent with commissions being the main source of advisor income. Results are robust to controlling for investor and local area characteristics. The results apply with stronger force to bank advisors than to independent financial advisors, consistent with greater limitations on bank advisory services.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 219.

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Date of creation: 15 Mar 2009
Date of revision: 03 Mar 2011
Handle: RePEc:sef:csefwp:219

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Keywords: Financial advice; portfolio choice; household finance;

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References

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  1. Luigi Guiso & Tullio Jappelli, 2007. "Information Acquisition and Portfolio Performance," Economics Working Papers ECO2007/45, European University Institute.
  2. Shapira, Zur & Venezia, Itzhak, 2001. "Patterns of behavior of professionally managed and independent investors," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1573-1587, August.
  3. Mark Grinblatt & Matti Keloharju, 2000. "What Makes Investors Trade?," Yale School of Management Working Papers ysm146, Yale School of Management, revised 01 Nov 2001.
  4. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
  5. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, 08.
  6. Yannis Bilias & Dimitris Georgarakos & Michael Haliassos, 2005. "Equity Culture and the Distribution of Wealth," CFS Working Paper Series 2005/20, Center for Financial Studies.
  7. Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-67, March.
  8. Alok Kumar & William N. Goetzmann, 2001. "Equity Portfolio Diversification," Yale School of Management Working Papers ysm236, Yale School of Management.
  9. Daniel Dorn & Gur Huberman, 2005. "Talk and Action: What Individual Investors Say and What They Do," Review of Finance, Springer, vol. 9(4), pages 437-481, December.
  10. Bilias, Yannis & Georgarakos, Dimitris & Haliassos, Michalis, 2009. "Portfolio Inertia and Stock Market Fluctuations," CEPR Discussion Papers 7239, C.E.P.R. Discussion Papers.
  11. Annamaria Lusardi & Olivia S. Mitchell, 2006. "Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth," CeRP Working Papers 54, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  12. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
  13. Barber, Brad M. & Loeffler, Douglas, 1993. "The “Dartboard” Column: Second-Hand Information and Price Pressure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(02), pages 273-284, June.
  14. Andrew Metrick, 1998. "Performance Evaluation with Transactions Data: The Stock Selection of Investment Newsletters," NBER Working Papers 6648, National Bureau of Economic Research, Inc.
  15. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  16. Roman Inderst & Marco Ottaviani, 2009. "Misselling through Agents," American Economic Review, American Economic Association, vol. 99(3), pages 883-908, June.
  17. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942, December.
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Cited by:
  1. Raffaele Miniaci & Sergio Pastorello, 2008. "Mean-Variance Econometric Analysis of Household Portfolios," Working Papers 0807, University of Brescia, Department of Economics.
  2. Mitchell Marsden & Cathleen Zick & Robert Mayer, 2011. "The Value of Seeking Financial Advice," Journal of Family and Economic Issues, Springer, vol. 32(4), pages 625-643, December.
  3. Dimitris Georgarakos & Roman Inderst, 2011. "Financial Advice and Stock Market Participation," BCL working papers 51, Central Bank of Luxembourg.
  4. Dimitris Georgarakos & Roman Inderst, 2011. "Financial advice and stock market participation," Working Paper Series 1296, European Central Bank.
  5. Hackethal, Andreas & Inderst, Roman & Meyer, Steffen, 2010. "Trading on Advice," CEPR Discussion Papers 8091, C.E.P.R. Discussion Papers.
  6. Joanne Yoong & Angela A. Hung, 2009. "Self-Dealing and Compensation for Financial Advisors," Working Papers 713, RAND Corporation Publications Department.

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