New Evidence on the Role of Financial Advice

• Applicants: Professor Dr. Stefan Ruenzi; Professor Dr. Nic Schaub
• Subject Area: Management and Marketing
• Term: since 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 495060102

Financial decisions are among the most important decisions households have to make. When making these decisions, many households rely on financial advice. In this project, we aim at better understanding the role of financial advice in three different contexts. All three subprojects are of empirical nature and use anonymized data on clients and financial advisors of a large Swiss bank. First, we will analyze the impact of financial advice on retirement savings. In past decades, many countries have reformed their pension system such that the responsibility for income during retirement is at least partially transferred from the state to individuals. A strong dependence on personal retirement savings makes people financially vulnerable and many retirees state that they wish they had saved more money for their retirement. We will analyze whether and how financial advice can help individuals to better prepare for retirement. In doing so, we will put a special focus on groups that have been shown to be particularly prone to undersaving for retirement, such as women, poorer individuals, and less educated individuals. Second, we plan to investigate whether and how financial advice can help investors to cope with crises situations. Specifically, we will use the recent COVID-19 crisis to investigate whether and how financial advisors help their clients to avoid panic and irrational behavior in times of increased uncertainty and anxiety. More specifically, we will examine how bank clients traded during the crisis, whether they sought and traded more or less on advice, whether financial advisors provided more or less advice, and how valuable this advice was. Third, we aim at better understanding the role of compensation structures for financial advisors. Particularly, we will investigate how a ban on payments from product providers to financial advisors (so-called kickbacks) affects the quality of financial advice. Kickbacks may result in biased financial advice as they incentivize advisors to recommend the products that pay the highest kickbacks rather than the products that are most suitable for the clients. To comply with new regulations in Switzerland and the European Union, the bank from which we obtain the data switched from a commission-based model of financial advice to a fee-based model of financial advice in January 2018. We will first investigate how this affected the profitability of different products from the bank’s perspective. We will then analyze whether and how the recommendations of advisors changed around January 2018. Finally, we will investigate whether the quality of advice improved following this ban on kickbacks. In summary, our project advances our understanding of the role of financial advice in financial markets. Hence, results of this project will not only be relevant for researchers, but also for policymakers, financial institutions, and the broader public.

• DFG Programme: Research Grants
• International Connection: Switzerland
• Partner Organisation: Schweizerischer Nationalfonds (SNF)
• Cooperation Partner: Professor Dr. Markus M. Schmid