How do individual investors respond to an offer of free, unbiased investment advice? In their August 2010 paper entitled “Is Unbiased Financial Advice To Retail Investors Sufficient? Answers from a Large Field Study”, Utpal Bhattacharya, Andreas Hackethal, Simon Kaesler, Benjamin Loos and Steffen Meyer evaluate the responses of 8,195 randomly selected active and likely self-directed individual clients of a large European broker to an offer of free advice. This advice, unbiased in that it is free of monetary incentives for the broker, consists of personalized written and verbal guidance on mean-variance optimization of the client’s existing portfolio based on the client’s risk tolerance, wealth and investment horizon. The broker initiated the offer via email, with telephone follow-ups by an advisor to non-respondents. Using portfolio holder characteristics and daily portfolio holdings/price data from September 2005-May 2009 pre-offer, May 2009-October 2009 offer and post-offer measurement intervals (through March 2010), along with advised portfolio adjustments, they find that:
- Only 385 (5%) of the 8,195 clients accept the offer.
- Compared to a typical client, those accepting tend to be male, older, wealthier and financially more sophisticated (higher, less volatile pre-offer returns) and have a longer relationship with the broker.
- Among accepted offers, recommended optimized portfolios are on average very different from pre-offer client portfolios. During the post-offer interval, recommended (pre-offer client) portfolios have an average return of 24.8% (21.2%), with a 9.6% (15.0%) standard deviation of returns. In other words, if implemented, the free advice would tend to improve client investment performance.
- However, very few clients who accept the offer actually follow the advice. Among those who accept, those with lower portfolio values are more likely to implement.
In summary, evidence suggests that individual investors tend to ignore offers of expert advice, and even those who accept tend not to implement. Investors may want to reflect on how they process expert advice, and advisors may want to consider how to address resistance to such advice.
Cautions regarding findings include:
- The test occurs just after dramatic losses for investors, perhaps an interval of exceptionally low investor confidence in the competence and motives of brokers.
- Broader evidence regarding investing expertise may and soundness of investing theory may induce resistance by investors to expert advice.
