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Is Conflicted Investment Advice Better than No Advice?

Author

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  • John Chalmers
  • Jonathan Reuter

Abstract

The answer depends on how broker clients would have invested in the absence of broker recommendations. To identify counterfactual retirement portfolios, we exploit time-series variation in access to brokers by new plan participants. When brokers are available, they are chosen by new participants who value recommendations on asset allocation and fund selection because they are less financially experienced. When brokers are no longer available, demand for target-date funds (TDFs) increases differentially among participants with the highest predicted demand for brokers. Broker client portfolios earn significantly lower risk-adjusted returns and Sharpe ratios than matched portfolios based on TDFs—due in part to broker fees that average 0.90% per year—but offer similar levels of risk. More generally, the portfolios of participants with high predicted demand for brokers who lack access to brokers comparable favorably to the portfolios of similar participants who had access to brokers when they joined. Exploiting across-fund variation in the level of broker fees, we find that broker clients allocate more dollars to higher fee funds. This finding increases our confidence that actual broker client portfolios reflect broker recommendations, and it highlights an agency conflict that can be eliminated when TDFs replace brokers.

Suggested Citation

  • John Chalmers & Jonathan Reuter, 2012. "Is Conflicted Investment Advice Better than No Advice?," NBER Working Papers 18158, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18158
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2015. "Money Doctors," Journal of Finance, American Finance Association, vol. 70(1), pages 91-114, February.
    2. Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C., 2017. "Does front-loading taxation increase savings? Evidence from Roth 401(k) introductions," Journal of Public Economics, Elsevier, vol. 151(C), pages 84-95.
    3. Cici, Gjergji & Kempf, Alexander & Sorhage, Christoph, 2012. "Are financial advisors useful? Evidence from tax-motivated mutual fund flows," CFR Working Papers 12-09, University of Cologne, Centre for Financial Research (CFR).
    4. Cici, Gjergji & Kempf, Alexander & Sorhage, Christoph, 2013. "Are financial advisors useful? Evidence from tax-motivated mutual fund flows," CFR Working Papers 12-09 [rev.2], University of Cologne, Centre for Financial Research (CFR).
    5. Sorhage, Christoph, 2014. "Outsourcing of mutual funds' non-core competencies and the impact on operational outcomes: Evidence from funds' shareholder services," CFR Working Papers 14-04, University of Cologne, Centre for Financial Research (CFR).
    6. Philippon, Thomas, 2016. "The FinTech Opportunity," CEPR Discussion Papers 11409, C.E.P.R. Discussion Papers.
    7. Cici, Gjergji & Kempf, Alexander & Sorhage, Christoph, 2014. "Do financial advisors provide tangible benefits for investors? Evidence from tax-motivated mutual fund flows," CFR Working Papers 12-09 [rev.3], University of Cologne, Centre for Financial Research (CFR).
    8. Sendhil Mullainathan & Markus Noeth & Antoinette Schoar, 2012. "The Market for Financial Advice: An Audit Study," NBER Working Papers 17929, National Bureau of Economic Research, Inc.
    9. Beyer, Max & de Meza, David & Reyniers, Diane, 2013. "Do financial advisor commissions distort client choice?," Economics Letters, Elsevier, vol. 119(2), pages 117-119.
    10. Cici, Gjergji & Kempf, Alexander & Sorhage, Christoph, 2013. "Are financial advisors useful? Evidence from tax-motivated mutual fund flows," CFR Working Papers 12-09 [rev.], University of Cologne, Centre for Financial Research (CFR).

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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