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B1b Financial Planners, Risk Tolerance and Portfolio Choice: Evidence of Moderating Effects from the Survey of Consumer Finances
Key Words
Financial planner, Risk tolerance, Portfolio choice, Survey of consumer finances
Short Description
The willingness to take financial risk plays an important role in shaping investment behavior. Risk-averse investors prefer less profitable and less risky portfolios, while risk-tolerant investors prefer more aggressive portfolios in terms of risk and expected return. However, to achieve the financial goals within the desired timeline, even risk-averse investors sometimes need to be tolerant of increased risk, and higly risk-tolerant investors might need to rebalance their portfolios toward safer allocations. The effect of using a financial planner on investment portfolio choices may vary according to the clients' risk tolerance. Using data from the 2016 Survey of Consumer Finances and the probit and Tobit models, this study examined the effects of consulting a financial planner on the extensive (whether to have stocks) and intensive (how much to invest in stocks) margins of the investment decisions. The probit analysis showed that using a financial planner increased the probability of participating in the stock market for low-to medium risk-tolerant investors. The Tobit analysis showed that using a financial planner encouraged risk-averse investors to invest more in stocks and curtailed investments in stocks among highly risk-tolerant investors. The results provide evidence on the moderating role that financial planners play in shaping investment behavior.
First & Corresponding Author
Danah Jeong, University of Georgia
Authors in the order to be printed
Danah Jeong, Patryk Babiarz