Information acquisition and financial advice

Gülen Karakoç, Marco Pagnozzi, Salvatore Piccolo and Giovanni Walter Puopolo

Economic Modelling, 2024, vol. 141, issue C

Abstract: This study analyzes the incentives for investors to delegate investment decisions to biased financial advisors who can acquire information about multiple risky asset characteristics. We show that the investor limits the amount of wealth a financial advisor can invest on her behalf to prevent unprofitable investment. This cap decreases as the conflict of interest between the investor and advisor widens and may be lower for a better-informed advisor. Although the investor always prefers a better-informed advisor, the advisor may choose to acquire less information to induce the investor to impose a higher cap. Reducing the conflict of interests between the investor and the advisor may not improve financial decisions, as it may discourage the advisor from acquiring more information. Our findings provide implications for policymakers seeking to regulate the delegated portfolio management industry, favoring better investment decisions.

Keywords: Financial advice; Asset allocation; Delegation; Information acquisition (search for similar items in EconPapers)
JEL-codes: D40 D82 D83 G11 G21 G51 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Information Acquisition and Financial Advice (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:141:y:2024:i:c:s0264999324002487

DOI: 10.1016/j.econmod.2024.106891

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