Nordic Finance and the Good Society Individuals Use

Nordic Finance and the Good Society Individuals’ Use of Financial Advice: the Role of Portfolio Performance, Trust, and Financial Literacy Prof. Dr. Oscar A. Stolper | Juniorprofessur Accounting & Finance | Philipps-Universität Marburg CENTER FOR CORPORATE

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Roads towards informed financial decisions Financial advice as a substitute for financial literacy ? Does financial advice benefit advisees? The role of trust in financial advice CENTER FOR CORPORATE Prof. Dr. Oscar A. Stolper | Juniorprofessur A&F | Philipps-Universität Marburg 3

FA as a substitute for financial literacy ? FA? The act of seeking advice requires the recognition of. Who one‘sseeks own ignorance Kruger and Dunning, 1999 / • Least financially sophisticated DC plan holders in most likely to take advice (Hung/Yoong, 2010; Chalmers and Reuter, 2012) • Low literate indebted individuals more likely to ask for professional credit counseling (Disney et al. , 2015) • & D E X MI NC E D I Individuals with higher Vlevels of financial literacy more E likely to receive financial advice E (Collins, 2012; Finke, 2013) • Financial advisors as „babysitters“ (Hackethal et al. , 2012) • Less financially literate rely more on informal sources of financial advice, e. g. friends and family (Van Rooij et al. , 2011) CENTER FOR CORPORATE Prof. Dr. Oscar A. Stolper | Juniorprofessur A&F | Philipps-Universität Marburg 4

FA as a substitute for financial literacy ? Who follows FA? „[Even] unbiased financial advice is useless unless it is followed” Bhattacharya et al. , 2012 • Less financially sophisticated bank clients more often fully delegate investment decisions (Calcagno/Monticone, 2015) • Financially sophisticated retail investors less likely to implement… • …investment advice (Hackethal et al. , 2011) • …advice on retirement planning (Bucher. Koenen/Koenen, 2015; Stolper, 2016) • …standardized FA (Stolper, 2016) • …advice on insurance of major life risks (Stolper, 2016) Y L A I C Y N L A E K N I I L F T T L S S A I A O C M LE N E A T N I A F R E W T O LI L E L C I O F ADV TO D O GO S W E N CENTER FOR CORPORATE Prof. Dr. Oscar A. Stolper | Juniorprofessur A&F | Philipps-Universität Marburg 5

Does financial advice benefit advisees? • FA enhances general PF efficiency (Bhattacharya et al, 2012) • FA improves PF diversification (Kramer, 2012; Von Gaudecker, 2015) • FA mitigates disposition effect (Shapira/Venezia, 2001; Hoechle et al. , 2016) • • • CENTER FOR CORPORATE D E X MI NC E passive benchmarks D Advisor-managed PF underperform I V (Bergstresser et E al. , 2009; Von Gaudecker et al. , 2015) E FA fails to de-bias clients (Mullainathan et al. , 2012) FA provides tax-related benefits (Finke, 2013; Cici et al. , 2017) • FA encourages clients to trade excessively (Hackethal et al. , 2011) • Advisor-managed PF underperform self-directed investments (Hoechle et al. , 2016) Prof. Dr. Oscar A. Stolper | Juniorprofessur A&F | Philipps-Universität Marburg 6

The role of trust in financial advice • Majority of retail clients trust their advisor (Mullainathan et al. , 2012; Monti et al. , 2014; Gennaioli et al. , 2015) • Interpersonal trust formation key to understanding the client-advisor interaction and counseling outcomes How does trust evolve? • Clients typically cannot discern good from bad advice (Chater et al. , 2010; Agnew et al. , 2016) • Advisees turn to salient factors when forming impressions about trustworthiness of FA (Monti et al. , 2014; Agnew et al. , 2016; Stolper/Walter, 2017) Is trust in financial advisors warranted? • Advisors cater to client’s misperceptions (Anagol et al. , 2015; Mullainathan et al. , 2016) • Advisors employ confirmation strategies (Gennaioli et al. , 2015; Agnew et al. , 2016) CENTER FOR CORPORATE Prof. Dr. Oscar A. Stolper | Juniorprofessur A&F | Philipps-Universität Marburg 7

Financial advice – the road ahead What is your job’s risk of computerization over the following 20 years? Source: BBC. com; Frey/Osborne (2017) CENTER FOR CORPORATE Prof. Dr. Oscar A. Stolper | Juniorprofessur A&F | Philipps-Universität Marburg 8

Financial advice – the road ahead Estimating the market for robo advice (example: Germany) ∑ Revenue = ∑ Assets (total) x % Advisees x % Market share RA x Mgmt. Fees ca. 1, 000, 000 EUR ca. 130, 000, 000 EUR Assets (Generations X and Y) Au. M∑Robo Advice (prospected) ca. 66% % Advised Individuals Au. M Robo Advice 170 m EUR ca. 10% (prospected) (2015)% Market Share RA 8. 600 m EUR ca. 50 bp (prospected) Mgmt. Fees ∑ Revenue Robo Advice Industry Germany ca. 43, 000 EUR Source: Etheber (2016) CENTER FOR CORPORATE Prof. Dr. Oscar A. Stolper | Juniorprofessur A&F | Philipps-Universität Marburg 9

References Agnew, J. R. , Bateman, H. , Eckert, C. , Iskhakov, F. , Louviere, J. , Thorp, S. , 2016. First Impressions Matter: An Experimental Investigation of Online Financial Advice. Manage. Sci. Anagol, S. , Sarkar, S. , Cole, S. , 2015. Understanding the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market, HBS Working Paper 12 -055. Bergstresser, D. , Chalmers, J. , Tufano, P. , 2009. Assessing the costs and benefits of brokers in the mutual fund industry. Rev. Financ. Stud. 22, 4129– 4156. Bhattacharya, U. , Hackethal, A. , Kaesler, S. , Loos, B. , Meyer, S. , 2012. Is unbiased financial advice to retail investors sufficient? Answers from a large field study. Rev. Financ. Stud. 25, 975– 1032. Bucher-Koenen, T. , Koenen, J. , 2015. Do seemingly smarter consumers get better advice? MEA Discussion Paper. Calcagno, R. , Monticone, C. , 2015. Financial literacy and the demand for financial advice. J. Bank. Financ. 50, 363– 380. Chalmers, J. , Reuter, J. , 2015. Is conflicted investment advice better than no advice? , NBER Working Paper No. 18158. Chater, N. , Huck, S. , Inderst, R. , 2010. Consumer decision-making in retail investment services  A behavioural economics perspective, Report to the European Commission. Cici, G. , Kempf, A. , Sorhage, C. , 2016. Do Financial Advisors Provide Tangible Benefits for Investors? Evidence from Tax-Motivated Mutual Fund Flows. Rev. Financ. Collins, J. M. , 2012. Financial advice: a substitute for financial literacy? Financ. Serv. Rev. 21, 307– 322. Disney, R. , Gathergood, J. , Weber, J. , 2015. Credit counseling: a substitute for consumer financial literacy? J. Pension Econ. Financ. 14, 466– 491. Etheber, T. 2016. Quo Vadis Robo Advice? Das Robo Advice-Dossier. IT-Finanzmagazin, Ausgabe 15. April. Finke, M. , 2013. Financial advice: does it make a difference? , in: Mitchell, O. S. , Smetters, K. (Eds. ), The Market for Retirement Financial Advice. Oxford University Press. Frey, C. B. , Osborne, M. A. , 2017. The future of employment: How susceptible are jobs to computerisation? Technol. Forecast. Soc. Change 114, 254– 280. Gennaioli, N. , Shleifer, A. , Vishny, R. , 2015. Money doctors. J. Finance 70, 91– 114. CENTER FOR CORPORATE Prof. Dr. Oscar A. Stolper | Juniorprofessur A&F | Philipps-Universität Marburg 10

References Hackethal, A. , Haliassos, M. , Jappelli, T. , 2012 a. Financial advisors: A case of babysitters? J. Bank. Financ. 36, 509– 524. Hackethal, A. , Inderst, R. 2015. Auswirkungen der Regulatorik auf kleinere und mittlere Banken am Beispiel der deutschen Genossenschaftsbanken. Gutachten im Auftrag des Bundesverbandes der Deutschen Volksbanken und Raiffeisenbanken (BVR) Hackethal, A. , Inderst, R. , Meyer, S. , 2012 b. Trading on Advice. Work. Pap. Hoechle, D. , Ruenzi, S. , Schaub, N. , Schmid, M. , 2016. The Impact of Financial Advice on Trade Performance and Behavioral Biases. Rev. Financ. 50. Hung, A. , Yoong, J. , 2013. Asking for Help: Survey and Experimental Evidence on Financial Advice and Behavior Change, in: Mitchell, O. S. , Smetters, K. (Eds. ), The Market for Retirement Financial Advice. Oxford University Press, pp. 182– 212. Kramer, M. M. , 2012. Financial Advice and Individual Investor Portfolio Performance. Financ. Manag. 41, 395– 428. Kruger, J. , Dunning, D. , 1999. Unskilled and unaware of it: how difficulties in recognizing one’s own imcompetence lead to. . . J. Pers. Soc. Psychol. 77, 1121– 1134. Monti, M. , Pelligra, V. , Martignon, L. , Berg, N. , 2014. Retail investors and financial advisors: New evidence on trust and advice taking heuristics. J. Bus. Res. 67, 1749– 1757. Mullainathan, S. , Noeth, M. , Schoar, A. , 2012. The Market for Retirement Financial Advice. NBER Work. Pap. No. 17929. Pauls, T. , Stolper, O. , Walter, A. , 2016. Broad-scope trust and financial advice. Work. Pap. Shapira, Z, Venezia, I. 2001. Patterns of behavior of professionally managed and independent investors. J. Bank. Financ. 25, 15731587 Stolper, O. , 2015. It takes two to Tango: Households’ response to financial advice and the role of financial literacy. Work. Pap. Stolper, O. , Walter, A. , 2017 a. Financial literacy, financial advice, and financial behavior. J. Bus. Econ. Stolper, O. , Walter, A. , 2017 b. Birds of a feather: The impact of social proximity on the propensity to follow financial advice. Work. Pap. van Rooij, M. C. J. , Lusardi, A. , Alessie, R. J. M. , 2011. Financial literacy and stock market participation. J. Financ. Econ. 101, 449– 472. von Gaudecker, H. M. , 2015. How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice? J. Finance 70, 489– 507. CENTER FOR CORPORATE Prof. Dr. Oscar A. Stolper | Juniorprofessur A&F | Philipps-Universität Marburg 11