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Information Acquisition and Financial Advice

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Abstract

This paper studies the interplay between the investor’s incentives to delegate her asset allocation choice to a biased financial advisor, and the advisor’s decision to acquire information about multiple characteristics of the risky asset. We show that, to prevent unprofitable investments, the investor may delegate to the advisor imposing a cap on the amount of wealth that the advisor can invest. This cap (i) is decreasing in the magnitude of the conflict of interests between the investor and the advisor and (ii) may be lower when the advisor possesses more information. Interestingly, although the investor always prefers a more-informed advisor, the advisor may choose not to acquire full information, and reducing the conflict of interests with the investor may actually induce the advisor to acquire less information.

Suggested Citation

  • Gülen Karakoç & Marco Pagnozzi & Salvatore Piccolo & Giovanni W. Puopolo, 2020. "Information Acquisition and Financial Advice," CSEF Working Papers 587, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:587
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    Keywords

    Financial Advice; Asset-Allocation; Delegation; Information Acquisition.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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