A Review of Advice Models and the Demographic Determinants of Using Financial Advisors and Counselors
J. Michael Collins
Prepared for presentation at the Financial Literacy Research Consortium
Financial Literacy Research Consortium
SSA FLFC 19-F-10003-5-01, University of Wisconsin
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The research reported herein was performed pursuant p
p f
p
to a grant from the U.S. Social Security Administration (SSA) funded as part of the Financial Literacy Research Consortium. Consortium
The opinions and conclusions expressed are solely those The
opinions and conclusions expressed are solely those
of the author(s) and do not represent the opinions or policy of SSA or any agency of the Federal Government or of the of the University of Wisconsin System, including Center for Financial Security.
SSA FLFC 19-F-10003-5-01, University of Wisconsin
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1. Overview
2. Research Question
3. Data
4. Findings
Overview
•
•
•
•
•
•
What are advice models?
What
are advice models?
Who are advice providers? For whom?
What role does advice play?
h
l d
d i
l ?
What kinds of advice exist?
Does advice make a difference?
Who takes up advice?
Who takes up advice?
SSA FLFC 19-F-10003-5-01, University of Wisconsin
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Research Approach
Research Approach
•
•
•
•
Literature Review
Literature
Review
Developing a Framework
S h i
Synthesis
Modeling take up of advice
– Address conflicting evidence
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of Wisconsin
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Framework
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Technical Experts
Technical Experts
•
•
•
•
Experts on narrow topic
Experts
on narrow topic
Objective advisors – unbiased ‘pure’ advice
C d i l d
Credentialed
Costly
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Technical Experts
• Theory: Economics of Information
– Stigler (1961): Consumers stop gathering information when marginal benefit of additional search equals the marginal cost
• Theory: Behavioral De‐biasing
– Bluethgen et al. (2008): Financial advisors add value to g
(
)
client’s portfolios by identifying and correcting the client’s cognitive mistakes
• Theory: Psychology / Affective
Th
P h l
/ Aff i
– Engelmann et al. (2009): Financial advice aides client’s decision‐making
decision
making processes and decisions are less taxing to processes and decisions are less taxing to
brain if client received advice
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Rationale
1 the
1.
the cost of obtaining financial information cost of obtaining financial information
may be lower for individuals who work with advisors, advisors
2. advisors can help individuals avoid making cognitive mistakes and
cognitive mistakes, and 3. advisors’ services may simply be a less costly substitute when clients’ own time and effort b i
h
li
’
i
d ff
are more valuable than the total costs of using advisor.
i
d i
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of Wisconsin
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Empirical Evidence
Empirical Evidence
Mixed at best
• Endogeneity between clients’ selection into advice and their financial capability
• Horn et al. (2009)‐
(
) change in German tax laws as natural experiment… g
p
financial advice helps clients avoid tax mistakes. • Hackethal et al. (2010): Clients who use financial advisors had lower returns and were more likely to incur substantial losses; advisors do not y
;
lead to better market timing or diversification – used IV
• Hung and Yoong (2010) – voluntary vs. mandatory advice
• Haslem (2010) matched broker accounts to advisor accounts: brokers Haslem (2010) matched broker accounts to advisor accounts: brokers
better
• Several others show no or negative effects (see Jansen et al. 2008; Kramer and Lensink 2009; Kramer 2009)
and Lensink 2009; Kramer 2009).
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Transactional Agents
Transactional Agents
• Focused on a specific transaction
Focused on a specific transaction
• Many examples
– Sales, broker, real estate agent, insurance agent, S l b k
l t t
t i
t
etc..
•
•
•
•
Weaker Credentials
W
k C d ti l
Self‐regulation
Costly?
Biased…at least potentially
Biased…at least potentially
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Transactional Agents
• Theory: Conflict of Interest
– Potential: Darby and Karni (1973), Demski and Sappington (1987), Krausz and Paroush (2002), Inderst and Ottaviani (2009), and Hung and Yoong dP
h (2002) I d t d Ott i i (2009) d H
dY
(2010)
– But also repeated game / reputation risk
– Fiduciary duty
• Empirical Evidence: Weak
p
– Very few ‘fee‐only” advisors ‐ compensated in a variety of ways
– Finke et al. (2009): Clients with financial planners more likely to have appropriate life insurance holdings than clients with insurance brokers
appropriate life insurance holdings than clients with insurance brokers
– Robinson (2007): Fee‐only pricing can cause advisors to overbill clients and do minimal work
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Financial Counselors
Financial Counselors
•
•
•
•
•
•
Acute problem solving
Acute
problem solving
Basic financial management
Intervention model
Strong nonprofit role Public subsidies
Not (generally) compensated by pushing
Not (generally) compensated by pushing particular financial products
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Counselors
• Theory: Little
– Directing
Directing, instructing and motivating clients (Kerkmann, instructing and motivating clients (Kerkmann
1998)
– Counselors assist clients when emotional stress is distorting their financial decision‐making
• Empirical Evidence: Some (mostly credit/loans)
– Collins (2007): Each additional hour of counseling reduced the probability of foreclosure outcomes
– Agarwal et al. (2009): Combining educational classes and Agarwal et al (2009): Combining educational classes and
one‐on‐one counseling significantly decreased mortgage default rates
– Endogeniety; Experiments lacking
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Financial Coaching
Financial Coaching
•
•
•
•
•
•
Performance improvement
Performance
improvement
Goal‐based
Cli
Client directed
di
d
Coach may not be an expert
Focus on self‐control & monitoring
Self actualization
Self‐actualization
– Implementation / Adherence SSA FLFC 19-F-10003-5-01, University of Wisconsin
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Coaching In General
Coaching In General
• Theory – mostly recent (and outside U.S.)
– Biswas‐Diener and Dean (2007): Coaching is a subset of positive (
)
g
p
psychology as it focuses on utilizing personal and social strengths to attain goals and achieve happiness
– Grant (2008): Coaching is solution or outcome focused and clients (
)
g
must not suffer from serious mental health issues
• Empirical Evidence: Too new
– Tidwell
Tidwell et al. (2004): Coaching for individuals with chronic health care et al (2004): Coaching for individuals with chronic health care
conditions resulted in better adherence to treatment
– Whittemore et al. (2004): Health coaching for diabetic women resulted in higher treatment satisfaction higher attendance and lower
resulted in higher treatment satisfaction, higher attendance and lower attrition rates
– Ariely and Wertenbroch (2002): Coaching can be more effective than self monitoring and help clients stick to their goals
self‐monitoring and help clients stick to their goals
SSA FLFC 19-F-10003-5-01, University of Wisconsin
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Summary of Literature
• Seems to be a rationale for technical expert, but few exist in market
– Not clear what value is in practice; babysitter?
• Most advisors are transactional
Most advisors are transactional
– Fiduciary weak – may undercut value
• Counsel on basic financial management
Counsel on basic financial management
– Crisis focused; subsidized
• Coaching – new ‐ adds adherence
– Self‐ control and executive attention
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Lot we don’t know
Ex: Take Up of Advice
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1. Overview
2. Research Question
3. Data
4. Findings
Data / Methods
Data / Methods
• Who
Who takes up advice? People with financial takes up advice? People with financial
literacy deficits or high capacity?
• Data source
Data source
• FINRA National Financial Capability Survey
• Telephone survey of 1,488 individuals
• Respondents asked if they sought p
y
g
advice, from what kind of advisor, and how they felt about financial advisors
y
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Who received advice?
Who received advice?
Source: Tabulations of FINRA National Financial Capability Survey
SSA FLFC 19-F-10003-5-01, University of Wisconsin
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Who received advice?
Who received advice?
Source: Tabulations of FINRA National Financial Capability Survey
SSA FLFC 19-F-10003-5-01, University of Wisconsin
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Findings—Take Up of Advisors
Factor
Debt Advisor
Investment Advisor
Loan Advisor
Insurance Advisor
Tax Advisor
Gender
‐‐
Male ↓
Male ↓
Male ↓
Male ↓
Male ↓
Male ↓
‐‐
Income
↑
↑
↑
↑
↑
Education
‐‐
↑
‐‐
↑
‐‐
Race
‐‐
Asian ↓ ‐‐
African American ↑
Hispanic ↓
Financial Literacy Score
‐‐
↑
‐‐
↑
↑
Income Drop
↑
↑
‐‐
↑
↑
Homeowner
↓
‐‐
↑
‐‐
‐‐
Source: Tabulations of FINRA National Financial Capability Survey
SSA FLFC 19-F-10003-5-01, University of Wisconsin
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Attitudes Toward Financial Advisors
Factor
Trust advisor
Advisor too expensive
Met multiple advisors
Gender
Male ↓
‐‐
Male ↑
Income
‐‐
↓ as income ↓
as income
increases
↑ as income ↑
as income
increases
Education
↑
‐‐
‐‐
Race
‐‐
Asian ↑
‐‐
Income Drop
Income Drop
↓
‐‐
‐‐
Homeowner
↓
‐‐
‐‐
Source: Tabulations of FINRA National Financial Capability Survey
SSA FLFC 19-F-10003-5-01, University of Wisconsin
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1. Overview
2. Research Question
3. Data
4. Findings
Conclusions
•
•
•
•
•
Advice models have potential
Advice
models have potential
Proposed general framework of complements
C
Compensation schemes matter
i
h
Little empirical evidence
Advice going to those with most capability –
y
babysitter model?
– Context may matter – planning vs. trigger event
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1. Overview
2. Research Question
3. Data
4. Findings
Implications / Next steps
Implications / Next steps
• Understanding psychology of advice Understanding psychology of advice
• Examine Fiduciary Duty under CFPB/Dodd Act
• Field experiments needed
i ld
i
d d
– Beyond portfolio measures
• Better understanding of counseling needed
• Coaching has emerging potential to support g
g gp
pp
self control; again need empirical work
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J. Michael Collins
Faculty Director, Center for Financial Security
University of Wisconsin‐Madison
University of Wisconsin
Madison
7401 Social Science, 1180 Observatory Drive
Madison, WI 53706
608‐616‐0369
jmcollins@wisc.edu For More Information: cfs.wisc.edu