Are Financial Advisors (Good) Match-Makers?

Project Start:04/2013
Researchers:Thomas Otter, Matthias Rumpf
Category: Household Finance
Funded by:LOEWE

Financial advisors are supposed to build their recommendations for financial products based on the thorough analysis of underlying financial needs. Data that links advised portfolio compositions, advisors’ beliefs and the investor’s risk-return preference as well as other demographic characteristics is rare if not non-existent. Therefore, it is not known if and how financial advisors react to background variables describing a household’s financial situation and risk. This research aims at closing this gap using survey based experiments that ask advisors to make portfolio recommendations for hypothetical clients.

We ran a survey based experiment in April/May 2015 and attracted a total of 800 respondents among 10,000 independent, non-bank advisors contacted by direct mail in April 2015. More than 500 completed the entire online survey. A parallel survey among households produced over 500 completes.

Data preparation and cleaning will be completed at the end of June. First, preliminary analyses suggest that the effort put into data collection and the recruitment of participants was worthwhile. Data analysis will continue through July and August 2015. A working paper is scheduled to be completed in late fall 2015.

The paper will provide evidence on the heterogeneity in advice and seek to answer where this heterogeneity stems from. Furthermore, it will analyze the potential impact of financial advice by measuring the distance between the heuristic portfolio rules of households and the implicit portfolio allocation strategies of professional advisors. Ultimately, the paper will answer the questions: “Can advisors add any value when giving recommendations on portfolio allocations?” – measured by the household-to-advisors portfolio rule distance. And, “Do independent advisors give recommendations that are consistent enough to be relied on?” – measured by heterogeneity in the advisors’ allocation rules.