A Review of Advice Models and the Demographic Determinants 

of Using Financial Advisors and Counselors

J. Michael Collins

Prepared for presentation at the Financial Literacy Research ConsortiumFinancial Literacy Research Consortium

1SSA FLFC 19-F-10003-5-01, University of Wisconsin

The research reported herein was performed pursuant p p f pto a grant from the U.S. Social Security Administration (SSA) funded as part of the Financial Literacy Research ConsortiumConsortium. 

The opinions and conclusions expressed are solely thoseThe opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the Federal Government or of the of the University of Wisconsin System, including Center for Financial Security.

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Overview1. Overview 2. Research Question 3. Data 4. Findings

Overview• What are advice models?What are advice models?• Who are advice providers? For whom?

h l d d i l ?• What role does advice play?• What kinds of advice exist?• Does advice make a difference?• Who takes up advice?Who takes up advice?

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Research ApproachResearch Approach

• Literature ReviewLiterature Review• Developing a FrameworkS h i• Synthesis

• Modeling take up of advice– Address conflicting evidence

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Framework

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Technical ExpertsTechnical Experts

• Experts on narrow topicExperts on narrow topic• Objective advisors – unbiased ‘pure’ adviceC d i l d• Credentialed

• Costly

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Technical Experts

• Theory: Economics of Information– Stigler (1961): Consumers stop gathering information when marginal benefit of additional search equals the marginal cost

• Theory: Behavioral De‐biasing– Bluethgen et al. (2008): Financial advisors add value to g ( )client’s portfolios by identifying and correcting the client’s cognitive mistakes

Th P h l / Aff i• Theory: Psychology / Affective– Engelmann et al. (2009): Financial advice aides client’s decision‐making processes and decisions are less taxing todecision making processes and decisions are less taxing to brain if client received advice

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RationaleRationale

1 the cost of obtaining financial information1. the cost of obtaining financial information may be lower for individuals who work with advisorsadvisors, 

2. advisors can help individuals avoid making cognitive mistakes andcognitive mistakes, and 

3. advisors’ services may simply be a less costly b i h li ’ i d ffsubstitute when clients’ own time and effort 

are more valuable than the total costs of i d iusing advisor.

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Empirical EvidenceEmpirical EvidenceMixed at best• Endogeneity between clients’ selection into advice and their financial 

capability• Horn et al. (2009)‐ change in German tax laws as natural experiment… ( ) g p

financial advice helps clients avoid tax mistakes. • Hackethal et al. (2010): Clients who use financial advisors had lower 

returns and were more likely to incur substantial losses; advisors do not y ;lead to better market timing or diversification – used IV

• Hung and Yoong (2010) – voluntary vs. mandatory advice• Haslem (2010) matched broker accounts to advisor accounts: brokersHaslem (2010) matched broker accounts to advisor accounts: brokers 

better• Several others show no or negative effects (see  Jansen et al. 2008; Kramer 

and Lensink 2009; Kramer 2009)and Lensink 2009; Kramer 2009).

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Transactional AgentsTransactional Agents

• Focused on a specific transactionFocused on a specific transaction• Many examples

S l b k l t t t i t– Sales, broker, real estate agent, insurance agent, etc..

W k C d ti l• Weaker Credentials• Self‐regulation• Costly?• Biased…at least potentiallyBiased…at least potentially

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Transactional Agents• Theory: Conflict of Interest

– Potential: Darby and Karni (1973), Demski and Sappington (1987), Krausz d P h (2002) I d t d Ott i i (2009) d H d Yand Paroush (2002), Inderst and Ottaviani (2009), and Hung and Yoong 

(2010)– But also repeated game / reputation risk– Fiduciary duty

• Empirical Evidence: Weakp– Very few ‘fee‐only” advisors ‐ compensated in a variety of ways– Finke et al. (2009): Clients with financial planners more likely to have 

appropriate life insurance holdings than clients with insurance brokersappropriate life insurance holdings than clients with insurance brokers– Robinson (2007): Fee‐only pricing can cause advisors to overbill clients 

and do minimal work

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Financial CounselorsFinancial Counselors

• Acute problem solving• Acute problem solving• Basic financial management• Intervention model• Strong nonprofit role • Public subsidies• Not (generally) compensated by pushing• Not (generally) compensated by pushing particular financial products

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Counselors• Theory: Little

Directing instructing and motivating clients (Kerkmann– Directing, instructing and motivating clients (Kerkmann, 1998)

– Counselors assist clients when emotional stress is distorting their financial decision‐making

• Empirical Evidence: Some (mostly credit/loans)– Collins (2007): Each additional hour of counseling reduced the probability of foreclosure outcomes

– Agarwal et al (2009): Combining educational classes and– Agarwal et al. (2009): Combining educational classes and one‐on‐one counseling significantly decreased mortgage default rates

– Endogeniety; Experiments lackingSSA FLFC 19-F-10003-5-01, University of Wisconsin 13

Financial CoachingFinancial Coaching

• Performance improvementPerformance improvement• Goal‐basedCli di d• Client directed

• Coach may not be an expert• Focus on self‐control & monitoring• Self‐actualizationSelf actualization

– Implementation / Adherence 

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Coaching In GeneralCoaching In General• Theory – mostly recent (and outside U.S.)

– Biswas‐Diener and Dean (2007): Coaching is a subset of positive ( ) g ppsychology as it focuses on utilizing personal and social strengths to attain goals and achieve happiness

– Grant (2008): Coaching is solution or outcome focused and clients ( ) gmust not suffer from serious mental health issues

• Empirical Evidence: Too newTidwell et al (2004): Coaching for individuals with chronic health care– Tidwell et al. (2004): Coaching for individuals with chronic health care conditions resulted in better adherence to treatment

– Whittemore et al. (2004): Health coaching for diabetic women resulted in higher treatment satisfaction higher attendance and lowerresulted in higher treatment satisfaction, higher attendance and lower attrition rates

– Ariely and Wertenbroch (2002): Coaching can be more effective than self monitoring and help clients stick to their goalsself‐monitoring and help clients stick to their goals

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Summary of Literature• Seems to be a rationale for technical expert, but few exist in market– Not clear what value is in practice; babysitter?

• Most advisors are transactionalMost advisors are transactional– Fiduciary weak – may undercut value

• Counsel on basic financial management• Counsel on basic financial management– Crisis focused; subsidized

• Coaching – new ‐ adds adherence– Self‐ control and executive attention

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Lot we don’t knowEx: Take Up of Advice

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Data / Methods1. Overview 2. Research Question 3. Data 4. Findings

Data / Methods

• Who takes up advice? People with financialWho takes up advice? People with financial literacy deficits or high capacity?

• Data source• Data source• FINRA National Financial Capability Survey• Telephone survey of 1,488 individuals• Respondents asked if they sought p y gadvice, from what kind of advisor, and how they felt about financial advisors

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y

Who received advice?Who received advice?

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Source: Tabulations of FINRA National Financial Capability Survey

Who received advice?Who received advice?

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Source: Tabulations of FINRA National Financial Capability Survey

Findings—Take Up of AdvisorsFactor Debt 

AdvisorInvestment  Advisor

Loan Advisor

Insurance Advisor

Tax Advisor

Gender Male↓ Male↓ Male↓Gender ‐‐ Male ↓ Male ↓ Male ↓ ‐‐

Income ↑ ↑ ↑ ↑ ↑

Education ‐‐ ↑ ‐‐ ↑ ‐‐

Race ‐‐ Asian ↓  ‐‐ African American ↑

Hispanic  ↓

Financial Literacy Score

‐‐ ↑ ‐‐ ↑ ↑

↑ ↑ ↑ ↑Income Drop ↑ ↑ ‐‐ ↑ ↑

Homeowner ↓ ‐‐ ↑ ‐‐ ‐‐

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Source: Tabulations of FINRA National Financial Capability Survey

Attitudes Toward Financial AdvisorsFactor Trust advisor Advisor too 

expensiveMet multiple advisors

Gender Male ↓ ‐‐ Male ↑

Income ‐‐ ↓ as income ↑ as incomeIncome ↓ as income increases

↑ as income increases

Education ↑ ‐‐ ‐‐

Race ‐‐ Asian ↑ ‐‐

Income Drop ↓Income Drop ↓ ‐‐ ‐‐

Homeowner ↓ ‐‐ ‐‐

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Source: Tabulations of FINRA National Financial Capability Survey

Conclusions1. Overview 2. Research Question 3. Data 4. Findings

Conclusions• Advice models have potentialAdvice models have potential• Proposed general framework of complementsC i h• Compensation schemes matter

• Little empirical evidence• Advice going to those with most capability –babysitter model?y– Context may matter – planning vs. trigger event

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Implications / Next steps1. Overview 2. Research Question 3. Data 4. Findings

Implications / Next steps• Understanding psychology of adviceUnderstanding psychology of advice • Examine Fiduciary Duty under CFPB/Dodd Act

i ld i d d• Field experiments needed– Beyond portfolio measures

• Better understanding of counseling needed• Coaching has emerging potential to support g g g p ppself control; again need empirical work

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J. Michael CollinsFaculty Director, Center for Financial SecurityUniversity of Wisconsin‐MadisonUniversity of Wisconsin Madison7401 Social Science, 1180 Observatory DriveMadison, WI 53706608‐616‐0369jmcollins@wisc.edu 

For More Information: cfs.wisc.edu