Abstract
This paper investigates whether financial advisors help clients improve their investment decisions. Using data from a large German universal bank, we address this key question from three perspectives. Does the consultation of financial advisors improve portfolio performance? Do financial advisors ameliorate their clients investment mistakes? Do advisor recommendations improve asset allocation? In our econometric analysis we go at great lengths to correct for the possible endogeneity of seeking professional advice. Our findings suggest the following: Firstly, involving financial advisors results in lower portfolio returns, higher risk, and thus, in lower risk-adjusted returns. Second, advisors correct for some but not all investment mistakes. Third, advisors do not generally improve the asset allocation in client portfolios. Overall, our analysis provides evidence that the advice oered by the sample bank lacks quality in some tangible dimensions. This implies that conventional types of financial advice may not be the best remedy for the widespread financial illiteracy of households.
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