To Trust is Good, But to Control is Better: How Do Investors Discipline Financial Advisors' Activity

Abstract

Using a survey of clients from one of the largest Italian banks, we investigate whether investors exert some form of control over the quality of the recommendations they receive, and, if so, which one. We find that investors with low levels of trust seek financial counseling, but make their decisions autonomously. Within this subgroup of investors, those with high self-assessed financial competence are more likely to control the quality of the advice. We also observe that their test-based degree of financial literacy affects the way they discipline the advisors. Investors with high financial literacy monitor the advisors' activity themselves. Investors with low financial literacy, however, are more likely to seek a second expert's opinion that confirms the recommendations previously received, such as in the case of credence services. Our findings suggest that access to different financial institutions is especially beneficial for investors with poor financial literacy.