2015 Conference

Diversification Advice Compensation

A presumed benefit of financial advice is that it encourages household participation in the stock market, which is wealth building. Most normative economic models suggest investment in the stock market. Using data from the 2010 Survey of Consumer Finances we confirm the positive relationship among households who seek investment advice from brokers and increase participation in the stock market.  We do not see a significant relationship between stock ownership and households who sought investment advice from a financial planner.  Households may turn to financial advice to overcome the constraints on their knowledge of personal finance and make better investment decisions.  A common investment mistake cited in many studies the failure of households to adequately diversify their equity holdings.  Using the 2010 SCF we test to determine if financial advice makes households less likely to hold undiversified equity portfolios.  We find older, more educated, and financially sophisticated households are less likely to hold undiversified equity holdings.  Similarly we find that the likelihood of owning an undiversified equity portfolio declines with financial assets.  However we do not find a significant relationship between financial advice and stock portfolio diversification.