Is Conflicted Investment Advice Better than No Advice?

John Chalmers and Jonathan Reuter

No 18158, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The answer depends on how broker clients would have invested in the absence of broker recommendations. To identify counterfactual retirement portfolios, we exploit time-series variation in access to brokers by new plan participants. When brokers are available, they are chosen by new participants who value recommendations on asset allocation and fund selection because they are less financially experienced. When brokers are no longer available, demand for target-date funds (TDFs) increases differentially among participants with the highest predicted demand for brokers. Broker client portfolios earn significantly lower risk-adjusted returns and Sharpe ratios than matched portfolios based on TDFs—due in part to broker fees that average 0.90% per year—but offer similar levels of risk. More generally, the portfolios of participants with high predicted demand for brokers who lack access to brokers comparable favorably to the portfolios of similar participants who had access to brokers when they joined. Exploiting across-fund variation in the level of broker fees, we find that broker clients allocate more dollars to higher fee funds. This finding increases our confidence that actual broker client portfolios reflect broker recommendations, and it highlights an agency conflict that can be eliminated when TDFs replace brokers.

JEL-codes: D14 G11 G23 (search for similar items in EconPapers)
Date: 2012-06
Note: AG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

Published as John Chalmers & Jonathan Reuter, 2020. "Is conflicted investment advice better than no advice?," Journal of Financial Economics, .

Downloads: (external link)
http://www.nber.org/papers/w18158.pdf (application/pdf)

Related works:
Journal Article: Is conflicted investment advice better than no advice? (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:18158

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w18158

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().