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To Trust is Good, but to Control Is Better: How Investors Discipline Financial Advisors'Activity

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Using a survey of clients from one of the largest Italian banks, we ?nd that investors with low level of trust in professional advisors seek ?nancial counselling, but make their decisions autonomously. We investigate whether these investors exert some form of control over the recommendations they receive, and, if so, which one. Investors can push advisors to provide better recommendations either by asking for a second expert?s opinion, such as in the case of credence services, or by monitoring closely the advisor?s activity themselves. We ?nd that three quarters of investors do not exert any control on advisors. Di¤erent types of ?nancial competence ? self-assessed or test-based ? serve di¤erent purposes. The investors featuring higher self-assessed ?nancial competence are more likely to control the advisor?s activity. The mechanism through which investors exert control over the advisors? activity depends instead on the investors? degree of test-based ?nancial literacy. Investors with high ?nancial literacy directly monitor the advisors?activity. Investors with low ?nancial literacy are more likely to seek a second professional opinion in support of the recommendations previously received. Our ?ndings suggest that improving investor ?nancial knowledge may foster direct control of the advisor?s activity. Moreover, facilitating the comparison between ?nancial products by standardized and centralized information may be very e¤ective to protect poorly literate investors.

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Paper provided by University of Turin in its series Department of Economics and Statistics Cognetti de Martiis. Working Papers with number 201718.

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Length: pages 55
Date of creation: May 2017
Handle: RePEc:uto:dipeco:201718
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  27. repec:cup:jpenef:v:16:y:2017:i:03:p:324-347_00 is not listed on IDEAS
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