We extend the Berk and Green (2004) model to allow clients to derive utility from both performance-related (alpha) services and non-alpha services, such as financial planning. Clients gradually learn about the value of these non-alpha services through their interactions with financial advisors. We test our model predictions using a dataset that covers 3,000 financial advisors and their 500,000 clients’ portfolios over 13 years. Consistent with our model, the total number of client investment plans, our empirical proxy for non-alpha services, is the primary driver of the revenues of broker-sold funds and advisors. Investment skills and performance do not significantly affect their revenues. In line with clients’ gradual learning about the value of non-alpha services, larger advisors experience lower client exit rates and derive most of their revenues from long-term clients who steadily increase their investments and use more non-alpha services over time. Our findings help rationalize the prevalence of financial advisors with costly investment recommendations and the survival in equilibrium of underperforming broker-sold mutual funds.
21 Maggio 2025
The seminar will be held Wednesday 21st of May 2025 at 12:00 in Aula Marrama, 6th floor - Via del Castro Laurenziano 9, Roma