Financial Advice Giving and Taking—Where are the Market’s Self-healing Powers and a Functioning Legal Framework When We Need Them?

• DOI: 10.1007/s10603-009-9099-4
• Publication Date: 2009-06-08T10:42:39Z
• Authors: Andreas Oehler; Daniel Kohlert
• Keywords: Advice (programming); Empirical evidence; Empirical Research; Self-interest

German banks tend to emphasize how satisfied their clients are with the financial advice they offer. Empirical evidence, however, suggests that this satisfaction may have little to do with the quality of the information exchange between clients and advisors but rather with substitute factors like the friendliness and appearance of the advisor. Applying the theoretical perspectives of New Institutionalism and Behavioural Finance we explain in this article why the coexistence of information and interest asymmetry between retail clients and advisors must lead to poor advice quality and why the market’s self-healing powers and the actual regulatory framework fail in preventing that. We support our theoretical analysis with some empirical evidence from a recent study we conducted to test the factual quality of the advice German banks give in the retail banking area. The results obtained are very consistent with previous findings of a poor level of quality of the information exchange between client and advisor and predominantly confirm our theoretical conclusions. We finally offer some suggestions that might pave the way out of this dilemma.