Human psychology can be perversely counter-intuitive. Psychological literature suggests that buyers often equate price with value. When advice is free, potential buyers often assume it is useless. That may have been what happened when a major European brokerage offered its clients free advice on mean-variance optimization of their portfolios. (Depending on your view of mean-variance optimization, maybe the advice really was useless.) The idea was that they could get additional input on asset allocation for free. Guess what happened? According to CXO Advisory:
- Only 385 (5%) of the 8,195 clients accept the offer.
- Compared to a typical client, those accepting tend to be male, older, wealthier and financially more sophisticated (higher, less volatile pre-offer returns) and have a longer relationship with the broker.
- Among accepted offers, recommended optimized portfolios are on average very different from pre-offer client portfolios. During the post-offer interval, recommended (pre-offer client) portfolios have an average return of 24.8% (21.2%), with a 9.6% (15.0%) standard deviation of returns. In other words, if implemented, the free advice would tend to improve client investment performance.
- However, very few clients who accept the offer actually follow the advice. Among those who accept, those with lower portfolio values are more likely to implement.
In summary, evidence suggests that individual investors tend to ignore offers of expert advice, and even those who accept tend not to implement. Investors may want to reflect on how they process expert advice, and advisors may want to consider how to address resistance to such advice.
Only 5% of the clients even accepted the free advice and very few clients who accepted the advice implemented it! Of the 385 retail investors who requested the advice, which involved portfolio diversification and free trades to implement it, 260 (68%) did not follow it at all. Of the 125 (32%) retail investors who implemented some of the advice, the average amount of advice followed was only 21%!
How interesting is that? Only about 1.5% of the total sample followed any of the advice—and the few who did implemented very little of it! The full paper shows that pre-advice portfolio performance was terrible and that the mean-variance optimization advice actually improved the portfolio performance, but investors didn’t want it. It would be interesting to see this study run once more with a nominal cost attached to the advice, even if the implementation was still offered for free. I would not be surprised to see more investors both request the advice and implement it if it was offered to them for $25.
Offering poor advice at any price is a losing proposition, but even offering good advice too cheaply may lead to little or no implementation. It may be important for advisors to make a good case for the value of their advice—and then to charge a realistic amount for it.
