How to Meet Private Investors' Advisory Needs

Abstract

This paper empirically investigates a novel approach for financial advisors to enhance customer satisfaction by segmenting customers based on their financial sophistication. We surveyed 761 customers of two German retail banks on their satisfaction with their latest purchase of an investment product. Customers had to state their perception of the advisory service that led to the purchase. In addition, their individual level of financial sophistication was evaluated. Results show that financial sophistication varies considerably among respondents and that the level of financial sophistication critically affects approval of a specific advisory approach. We find that customer satisfaction would increase significantly if banks offered a tailored advisory approach to the different customer groups. Advisors who take into account investors' financial sophistication can increase customer acceptance of their recommendations and thereby better assist their advisees in improving decision making. The paper contributes to the role of financial advice in investor decision making which is an increasingly important issue that has not been addressed in any detail in literature. This is the first study that empirically analyses the implications of behavioral investor characteristics on the optimal design of financial advisory.