The effects of fee structure and financial planning service on individual investors portfolio

Abstract

Two critical factors that determine the effect of financial advisors on client portfolio performance are advisor fee structure and the type of advice provided. We find that financial advisors incentivised to provide on-going advice (by a higher, fixed percentage asset-under-advice fee) have clients with higher risk-adjusted returns, more portfolio diversification, more portfolio updates and lower fund fees, after controlling for client sophistication and fixed time effects. Higher fee-paying clients do not exhibit higher equity allocation in their portfolio. These full sample results also hold in the difference-in-difference setting. While the additional risk adjusted returns associated with on-going advice only cover part of the advice fee (hence suggesting that the service may be overpriced) we provide new evidence that advisors with the right incentive can improve client portfolio return performance and lower fund fees.