Is Unbiased Financial Advice to Retail Investors Sufficient? Answers from a Large Field Study

Bhattacharya, Utpal; Hackethal, Andreas; Kaesler, Simon; Loos, Benjamin; Meyer, Steffen

doi:10.1093/rfs/hhr127

Cited by 308 publications

(78 citation statements)

References 69 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Drawing on the 2008 and 2009 waves of the German SAVE household survey, the authors find that smarter investors indeed receive better advice, thus confirming their model predictions. In a related study, Bhattacharya et al (2012) find that those customers of a German online broker who opted to obtain financial advice in a field study were among the most financially literate clients, and Hackethal et al (2012) show that advisors of a large German retail bank are matched with wealthier and older investors (proxied to be more financially sophisticated), which also points to a complementarity of financial literacy and financial advice. The authors interpret their findings with respect to both the demand-side and the supply-side of advice.…”

Section: Financial Literacy and The Demand For Financial Advicementioning

confidence: 91%

“…Yet, a number of contributions in the field find that advised accounts are on average associated with higher costs, lower returns and inferior risk-return tradeoffs (Bergstresser et al 2009;Hackethal et al 2012;Kramer 2012) and conclude that advisors do not add value through their investment recommendations when judged relative to passive investment benchmarks (Foerster et al 2014). Also, while there is some consensus that advice can improve retail investor portfolio decisions if conflicts of interest are mitigated (Bhattacharya et al 2012;Hung and Yoong 2010), a typical advisor's incentive structure does in fact create a conflict of interest, leading advisors to reinforce biases of their clients instead of correcting them (Mullainathan et al 2012) and tilt their recommendations towards costly transactions (Hoechle et al 2015).…”

Section: Financial Advice Versus Financial Educationmentioning

confidence: 99%

See 1 more Smart Citation

Financial literacy, financial advice, and financial behavior

2017

View full text Add to dashboard Cite

In this survey, we review the voluminous body of literature on the measurement and the determinants of financial literacy. Wherever possible, we supplement existing findings with recent descriptive evidence of German households' financial literacy levels based on the novel Panel on Household Finances dataset, a large-scale survey administered by the Deutsche Bundesbank and representative of the financial situation of households in Germany. Prior research not only documents generally low levels of financial literacy but also finds large heterogeneity in financial literacy across the population, suggesting that economically vulnerable groups are placed at further disadvantage by their lack of financial knowledge. In addition, we assess the literature evaluating financial education as a means to improve financial literacy and financial behavior. Our survey suggests that the evidence with respect to the effectiveness of the programs is rather disappointing. We also review the role of individuals' financial literacy for the use of professional financial advice and assess whether expert intervention can serve as a substitute to financial literacy. We conclude by discussing several directions for future research.

show abstract

Section: Financial Literacy and The Demand For Financial Advicementioning

confidence: 91%

Section: Financial Advice Versus Financial Educationmentioning

confidence: 99%

Financial literacy, financial advice, and financial behavior

2017

View full text Add to dashboard Cite

show abstract

“…4 funds. Bhattacharya et al (2012) document that only few retail investors are interested in free and independent investment advice, and if they obtain it, hardly follow the advice. 4 We contribute to this literature by identifying important effects of consumer education on consumer prices and welfare exactly in those situations when educational effects are expected to be limited.…”

Section: Non-technical Summarymentioning

confidence: 99%

Add-on Pricing in Retail Financial Markets and the Fallacies of Consumer Education*

Kosfeld

Schüwer

2016

Review of Finance

View full text Add to dashboard Cite

Empirical evidence from retail financial markets shows that some consumers are naive about the full costs of the products they purchase. For example, they may not consider the costs of expensive overdrafts or high fees of investment products when they open a bank account. Retail banks -and more generally firms operating in markets with naive consumers -are likely to exploit this. As shown by previous research, the equilibrium pricing strategy of firms in a situation with sufficiently many naive consumers is to compete purely on the price of a base good (bank account) and to shroud information about prices of add-ons (overdrafts, investment products). While the base good is priced below marginal costs, the price of the add-on is above marginal costs. The consequences for consumers are twofold: First, sophisticated consumers who rationally expect that addons are overpriced will search for substitution possibilities, leading to smaller firm revenues and inefficiencies if substitution costs exceed firms' costs of production. Second, naive consumers who buy the add-on at the high price subsidize the low-priced base good and thereby also sophisticated consumers, which raises consumer protection concerns. The question is if and how a regulator may intervene to increase economic welfare and protect consumers in their decision making. This paper examines the effectiveness of consumer education, which is a simple and popular form of regulatory intervention, to mitigate adverse effects for naive consumers. Intuition suggests that such initiatives -if effective -will have only positive effects on consumer protection and welfare, and may eventually lead to efficient market outcomes if only the educational boost is strong enough to make many naive consumers sophisticated. In contrast, our results show that this simple intuition is wrong. Due to firms' strategic responses welfare consequences of consumer education are more intricate and consumer education may actually cause unintended damages for consumers.Allowing for different information and pricing strategies, our first key result shows that education is unlikely to push firms to disclose prices towards all consumers, which would be socially efficient. Instead, price discrimination emerges as a new equilibrium. This is what we view as the first fallacy of consumer education in retail financial markets: It is less relevant how consumer costs and welfare change when firms are pushed into a prices equilibrium where firms disclose prices towards all consumers (since this is unlikely to happen), but how these outcomes change in a price equilibrium where firms price discriminate between sophisticated and naive consumers.The second key result of our model, and additional fallacy of consumer education, is that in contrast to common intuition, education which is good for the single educated consumer may be bad for consumers who stay naive and even for the group of consumers as a whole. Due to a strategic feedback on prices, educating some consumers may entail hidden costs for all o...

show abstract

“…targeted at their needs and provided free of charge (Bhattacharya, Hackethal, Kaesler, Loos and Meyer, 2012). In addition, they are more easily misled by pro-forma earnings disclosures and often use overly simplistic valuation models (Elliot, 2006;Frederickson and Miller, 2004).…”

Section: Experimental Evidence Indicates That Retail Investors Tend Tmentioning

confidence: 99%

Who Uses Financial Reports and for What Purpose? Evidence from Capital Providers

Cascino

Clatworthy

Osma

et al. 2014

Accounting in Europe

View full text Add to dashboard Cite

We review the academic literature on the use of financial reporting information by capital providers. We classify our findings by investor type and by information objective. While most capital providers use accounting information, our survey indicates that they do so in a variety of ways with financial reporting information competing with other sources of information. We also find that information intermediaries are influential in both credit and equity markets, making the identification of a typical target 'user' inherently difficult. Our main findings question the underlying objective of the Conceptual Framework to guide the development of standards for general-purpose financial statements to provide a typical knowledgeable investor with a true and fair view about the reporting entity. Finally, we identify gaps in the literature and suggest areas where future research can help inform important academic and policy debates.

show abstract

Is Unbiased Financial Advice to Retail Investors Sufficient? Answers from a Large Field Study

Cited by 308 publications

References 69 publications

Financial literacy, financial advice, and financial behavior

Financial literacy, financial advice, and financial behavior

Add-on Pricing in Retail Financial Markets and the Fallacies of Consumer Education*

Who Uses Financial Reports and for What Purpose? Evidence from Capital Providers

Contact Info

Product

Resources

About