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The Market for Financial Advice: An Audit Study

  • Sendhil Mullainathan
  • Markus Noeth
  • Antoinette Schoar

Do financial advisers undo or reinforce the behavioral biases and misconceptions of their clients? We use an audit methodology where trained auditors meet with financial advisers and present different types of portfolios. These portfolios reflect either biases that are in line with the financial interests of the advisers (e.g., returns-chasing portfolio) or run counter to their interests (e.g., a portfolio with company stock or very low-fee index funds). We document that advisers fail to de-bias their clients and often reinforce biases that are in their interests. Advisers encourage returns-chasing behavior and push for actively managed funds that have higher fees, even if the client starts with a well-diversified, low-fee portfolio.

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File URL: http://www.nber.org/papers/w17929.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17929.

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Date of creation: Mar 2012
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Handle: RePEc:nbr:nberwo:17929
Note: AP CF
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  1. Diane Del Guercio & Jonathan Reuter & Paula A. Tkac, 2010. "Broker Incentives and Mutual Fund Market Segmentation," NBER Working Papers 16312, National Bureau of Economic Research, Inc.
  2. Henry S. Schneider, 2012. "Agency Problems and Reputation in Expert Services: Evidence from Auto Repair," Journal of Industrial Economics, Wiley Blackwell, vol. 60(3), pages 406-433, 09.
  3. John Chalmers & Jonathan Reuter, 2012. "What is the Impact of Financial Advisors on Retirement Portfolio Choices and Outcomes?," NBER Working Papers 18158, National Bureau of Economic Research, Inc.
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