Financial advisors influence on private investors’ financial decisions

Abstract

Most individual retail investors today rely on recommendations from financial advice when investing in stocks or bonds. Understanding the impact of financial advice on individual investors portfolio decision is thus of great importance, yet relatively little is known about this topic. This paper contributes to the understanding of the effects of financial advice on investors’ asset allocation and examines whether clients act according to their estimated risk profile or if other determinants influence their decisions. Our results show that financial advisors exert little influence over their clients’ asset allocation, and differences is rather due to clients’ attributes, particularly risk tolerance and investment horizon. Further, we find no evidence that deviations from recommended investment (based on clients’ attributes) are due to advisors’ influence. Actually, the findings indicate a weak explanatory power of both client and advisor characteristics on equity deviation, and a remarkable difference in client’s deviation from recommendations remains unexplained.