Financial Advice: An Improvement for Worse?

Using data from a large German commercial bank, this paper focuses on three key issues in order to analyze the extent of financial advice in individual portfolios. First, we investigate whether collaboration with financial advisors attains to better performing portfolios. Second, we examine the effects of financial advisors on household investment mistakes. Third, we analyze whether accounts run by advisors display superior asset allocation and better market timing in comparison to self-managed portfolios. Econometric analysis that corrects for the possible endogeneity of making use of financial advice suggests that involvement of financial advisors results in lower portfolio returns, higher risk, and thus, in lower risk-adjusted returns. Further, we document that financial advisors provide, at aggregate level, asset allocation recommendations that are inferior to those of selfmanaged portfolios. Even though we identify some benefits of advisors such as attenuation of home bias and excessive trading, overall, our analysis implies that financial advice lacks quality in some tangible dimensions.