Financial Advisors and Investors' Bias [New!]

Abstract

Can financial advisors mitigate their clients’ investment biases? We answer this question by exploiting a natural experiment at a large brokerage firm that provides advisory services to high-net-worth investors. In 2018, the firm changed the information displayed on its internal platform so that financial advisors could no longer observe which of their clients’ holdings were in paper gain or loss. Using data on portfolio stock transactions between 2016 and 2021, we show that, while all investors exhibit a significant disposition effect before 2018, i.e., a greater propensity to realize paper gains than losses, highly-advised investors see their bias significantly reduced after 2018. This decrease in disposition effect bias leads to higher portfolio returns, increased client inflow, and a lower likelihood of leaving the firm. Our study highlights how manipulating advisors’ information can help mitigate investors’ biases.