How to meet private investors’ advisory needs

[Christian Jansen, E-Finance Lab]

There is abundant evidence from Behavioral Economics that investors suffer from bounded rationality and bounded will (summarized here under the term financial involvement). Financial advisory may therefore increase advisee utility by improving decision making. However, advisors must first obtain advisees’ approval of their advisory approach. Based on survey data from some 760 customers of two German retail banks, we show that financial involvement varies considerably among respondents and that the level of financial involvement critically affects approval of a specific advisory approach. We find that both sample banks apply virtually the same advisory approach to high involved and low involved customers and that customer approval and satisfaction would increase significantly if banks offered a tailored advisory approach to each of these two customer groups. We conclude that customer segmentation based on financial involvement can be beneficial to both banks and their customers.