Retail Financial Advice: Does One Size Fit All?

Authors

Stephen Foerster, Western University
Juhani T. Linnainmaa, University of Chicago Booth School of Business
Brian T. Melzer, Northwestern University
Alessandro Previtero, Western University

Document Type

Article

Publication Date

7-2015

Volume

72

Issue

4

Journal

The Journal of Finance

First Page

1441

URL with Digital Object Identifier

https://doi.org/10.1111/jofi.12514

Last Page

1482

Abstract

Using unique data on Canadian households, we show that financial advisors exert substantial influence over their clients' asset allocation, but provide limited customization. Advisor fixed effects explain considerably more variation in portfolio risk and home bias than a broad set of investor attributes that includes risk tolerance, age, investment horizon, and financial sophistication. Advisor effects remain important even when controlling flexibly for unobserved heterogeneity through investor fixed effects. An advisor's own asset allocation strongly predicts the allocations chosen on clients' behalf. This one‐size‐fits‐all advice does not come cheap: advised portfolios cost 2.5% per year, or 1.5% more than life cycle funds.

Notes

This is the author accepted version of an article published in The Journal of Finance. The final published version can be found at https://doi.org/10.1111/jofi.12514

AWAITING IVEY APPROVAL