2012-03: Why are financial advisor participation rates so low? (Working paper)

Abstract

This study presents a simple analytical framework to identify the key determinants underlying the incentives for households to engage financial advisors. Using the US 2007 Survey of Consumer Finances we employ a logistic regression approach to understand the characteristics of households who engage financial advisors for investment or comprehensive financial advice. We find that age, education, employment category, income and net worth are highly significant variables related to the propensity to engage a financial advisor. The results also indicate significantly reduced active engagement between advisors and low net worth investors than claimed by the low net worth investors in the survey. We construct a model to derive the expected fee profile of financial advisors as a function of wealth and compare the fee structure against a financial advisor client portfolio. We find that a combination of lower aggregate costs per investor and higher expected fee income motivates advisors to target higher net worth investors. Advisors therefore prefer higher net worth investors due to the lower aggregate costs of engagement which drives low investment participation rates by less wealthy households.