Custom Financial Advice versus Simple Investment Portfolios:A Life Cycle Comparison
Date of this Version
Using a theoretical life cycle model, we evaluate how much workers benefit from having the option to hire a financial advisor when it is costly for employees to rebalance their own financial portfolios. Results indicate that having access to a financial advisor at the start of one’s career can be quite beneficial. If delegation to an advisor is available only a decade after entering the labor market, the benefit of delegation is cut by half, and it falls further if delegation is available only later in life (at age 60). We also examine whether simpler target date funds (TDF) and fixed-weight portfolios benefit consumers, compared to the outcomes with customized financial advice. We show that the simpler portfolio products would need to be provided at zero cost, in order to benefit consumers as much as having access to a financial advisor.
Portfolio inertia, life cycle saving, household finance, human capital, financial advice
G11, D14, D91
Working Paper Number
All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council. © 2016 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
The authors are grateful for research support provided by NIH/NIA Grant #P30-AG12836 and NIH/NICHD Population Research Infrastructure Program R24 HD-044964, and the Pension Research Council/Boettner Center for Pensions and Retirement Security at the University of Pennsylvania. The authors also received research funding from the Metzler Exchange Professor program at the Goethe University of Frankfurt, the German Investment and Asset Management Association (BVI), and the Special Research Fund at the SKK GSB, SKK University. The Wharton High Performance Computing Platform provided an excellent setting for the numerical analysis. Opinions, findings, interpretations, and conclusions represent the views of the authors and not those of the affiliated institutions.
Date Posted: 06 March 2019