Abstract:
Using a unique administrative data set from a large German commercial bank, this paper aims to ascertain the role of financial advisors in individual portfolios. Following on the heels of the ongoing regulatory and political debate as to the merits of financial advice, we focus in this paper on three key issues. First, we examine whether collaboration with financial advisors attains to better performing portfolios. Second, we investigate whether the involvement of financial advisors mitigates costly investment mistakes. Third, we document whether financial advisors provide asset allocation recommendations that market time. Econometric analysis that is corrected for the endogeneity of making use of financial advice suggests that collaboration with financial advisors lowers portfolio returns, increases portfolio risk, and results in worse market timing than is the case when individuals manage their accounts on their own. Nevertheless, the involvement of financial advisors helps investors to attenuate costly investment mistakes such as underdiversification, home bias and portfolio churning. Overall, this paper implies that financial advice lacks quality in some tangible dimensions; however, in the end it is the customer who gauges the added value of financial advisors.