E-Finance Lab Team

Many private investors rely on the recommendations of professional financial advisors when making investment decisions. However, financial advice is a credence good and its quality is notoriously difficult to assess even ex-post. This paper aims to shed light on financial advisor characteristics that might serve as quality indicators. We surveyed 260 German independent financial advisors (IFA) and obtain three main findings. Firstly, there is a high degree of heterogeneity in quality among financial advisors. Secondly, the extent to which advisors receive compensation in the form of fixed fees instead of sales commissions as well as the extent to which advisors exhibit a high degree of rationality in decision making are predictive of high-quality financial advice. Taking the compensation scheme and rationality into account when selecting a financial advisor might therefore improve the investment decisions of households.