Do Seemingly Smarter Consumers Get Better Advice?

MEA Discussion Paper 01-2015 von Tabea Bucher Koenen und Johannes Koenen

Abstract

In this paper, we study the interaction between financial advisors and customers with a potential conflict of interest. We show in a simple analytical framework that advisors have an incentive to provide better advice to consumers who appear to be better informed. From this, we derive an identification strategy to infer the quality of advice received from variables observed in a representative survey of German consumers. Our identification strategy makes use of the fact that we observe both a generally observable signal of a customer's financial literacy as well as an objective measure, which is not observed by the advisor. We apply this strategy to three different empirical settings. In each of these settings, we find consistent evidence that consumers with worse signals of financial literacy on average receive worse financial advice. In particular, both women and individuals without tertiary education are negatively affected.

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