Working Paper: NBER ID: w17929
Authors: Sendhil Mullainathan; Markus Noeth; Antoinette Schoar
Abstract: Do financial advisers undo or reinforce the behavioral biases and misconceptions of their clients? We use an audit methodology where trained auditors meet with financial advisers and present different types of portfolios. These portfolios reflect either biases that are in line with the financial interests of the advisers (e.g., returns-chasing portfolio) or run counter to their interests (e.g., a portfolio with company stock or very low-fee index funds). We document that advisers fail to de-bias their clients and often reinforce biases that are in their interests. Advisers encourage returns-chasing behavior and push for actively managed funds that have higher fees, even if the client starts with a well-diversified, low-fee portfolio.
Keywords: Financial advice; Behavioral biases; Investment decisions
JEL Codes: G02; G1; G11; G2; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Advisers' self-interest (G24) | Recommendations that are detrimental to clients (L84) |
| Advisers encourage clients to invest in actively managed funds (G23) | Clients invest in actively managed funds (G23) |
| Advisers discourage investment in diversified low-fee index funds (G23) | Clients do not invest in diversified low-fee index funds (G23) |
| Advisers tailor recommendations based on client demographics (G51) | Older clients are encouraged to invest in actively managed funds (G23) |
| Advisers did not significantly adjust recommendations based on client's investment amount or age (G11) | Advisers fail to adhere to portfolio theory (G11) |