The value of financial advice: An analysis of the investment performance of advised and non-advised individual investors

Abstract

Financial advisors have long been considered a part of the financial market through the advice that they offer investors. Behavioural finance has demonstrated that individual investors do not always behave in a rational manner, unlike financial advisors who seem not be prone to the behavioural biases that individuals experience when investment decisions are made. Furthermore, financial advisors have greater access to information, financial analytical tools, as well as better education in financial markets compared to the average individual. Financial advisors are thus better equipped to assist individual investors and provide them with improved investment results.This study investigated the value added by financial advisors in the investment performance of advised individual investors as opposed to non-advised individuals. The study wanted to establish whether financially advised individuals showed greater return on investments than non-advised individuals. A sample of individual investors from a large South African investment house were analysed across the investment categories of an advised investor and a non-advised investor for a period of 10 years from 1 January 2005 to 31 December 2014. The data was analysed to draw conclusions on returns, trading behaviour, the risk profile of investors and the reasons for differences identified.The results indicated that there is no statistical difference between the returns generated between advised investors, non-advised investors and the fund invested over the period. There was a statistical difference between the number of trades entered into by advised and non-advised investors, with advised investors making statistically more trades than nonadvised investors. There was no significant difference between the risk profiles of the investors based on qualitative data. The results indicate that there is no significant additional benefit of utilising a financial advisor, after the initial decision of which fund to invest in has been made.3

A Model for Personal Financial Planning Towards Retirement

“…Regarding the variables in T1, it is noteworthy that the most important source of influences to determine financial management behaviour seems to be attitudes. Accordingly to prior findings (Kim et al, 2018;, commitment to consulting evidenced a strong influence on financial management behaviour, that suggest that financial planners do help individuals achieve their retirement financial objectives by highlighting the importance of retirement planning, and they can improve the decision-making process (Engelmann et al, 2009;Kramer, 2012), and consequently individuals can get greater return on investments (Allie et al, 2016). Contrarily to the result of Marsden et al (2011), financial advisory in the present study was not related to retirement savings.…”

Who trades profusely? The characteristics of individual investors who trade frequently

“…Furthermore, research into investors trading of funds suggests that investors who receive advice trade more than investors who do not. Using data from a specific equity fund of a South African investment house over the period from 1 January 2006 to 31 December 2014, Allie, West and Willows (2016) showed that advised investors enter or exit their funds more often than non-advised investors. However, the increased trade frequency by advised investors did not translate into any significant difference in the returns earned.…”

Monday mornings: Individual investor trading on days of the week and times within a day

“…However, Richards and Willows (2018) found trading frequency to be positively skewed across individual investors, in that a small proportion of individual investors are responsible for most of the trading. Moreover, advised investors make statistically significantly more trades than non-advised investors (Allie, West, & Willows, 2016;Richards & Willows, 2018). These studies emphasize that the behavior of trading frequently amongst individual investors occurs globally.…”