Retail Financial Advice: Does One Size Fit All?

Non-Exclusive Financial Advice

“…In this perspective, our analysis suggests that older advisors, whose should be relatively low, should induce (other things being equal) their clients to take excessive risk in order to cash commission fees. This prediction is consistent with the evidence provided by Foerster et al (2014), who …nd that older advisors are more willing to give their clients riskier products because, being close to or over the retirement age, they do not need to be 23 The advisor may anticipate the investor's …ring behavior due to her past experience or insider knowledge of the market. 24 When the advisor bears a reputational cost even when only one client …res her, the result of the analysis does not change qualitatively provided that the cost of loosing both clients is su¢ ciently larger than the cost of loosing only one.…”

“…By contrast, when it is optimal to impose a ‡oor (e.g., when experts care particularly about reputation), investor are more likely to delegate when buying products with a low risk pro…le. Although there is no available evidence on the correlation between investor's propensity to delegate and the characteristics of the products they buy, the emergence of an equilibrium with partial delegation, whose features do not depend exclusively on investors'characteristics, seems consistent with the evidence collected by Foerster et al (2014) who …nd that clients'observable characteristics jointly explain only 11% of the variation in risky share in the cross-section of Canadian households. They argue that advisor …xed e¤ects have substantial explanatory power and impute this evidence to the advisors'idiosyncratic 'tastes'in portfolio allocation, which may re ‡ect agency con ‡icts similar to those highlighted in our paper.…”

“…Interestingly, even if there is no direct evidence on the 'correlation' between non-exclusivity, investor's propensity to delegate, the characteristics of the products they buy and their risk exposure, the emergence of equilibria with partial delegation, whose features do not depend exclusively on investors' characteristics, seems consistent with the evidence collected by Foerster et al (2014) who …nd that 2 That is, the allocation that would arise in case the investor is fully informed about the state of the world.…”

“…19 Suppose, just for simplicity, that these commissions are entirely passed through by the bank to the (riskneutral) advisor. Finally, following Ottaviani (2000), suppose the expert's expected utility is equal to 18 These reports are available at: https://www.fca.org.uk/static/fca/documents/…nalised-guidance/fsa-fg13-01.pdf http://www.consumersinternational.org/media/1529404/sales-incentive-report_riskybusiness_…nal2_151014.pdf 19 The assumption that C ( ) is a twice continuously di¤erentiable function is just a convenient approximation.…”

“…This evidence should be interpreted with care though. Indeed, Foerster et al (2014) do not account explicitly for the non-exclusive dimension of …nancial advice, although by considering retail investors they are quite likely restricting attention to deals that are non-exclusive.…”