Information acquisition and financial advice

Abstract

This study analyzes the incentives for investors to delegate investment decisions to biased financial advisors who can acquire information about multiple risky asset characteristics. We show that the investor limits the amount of wealth a financial advisor can invest on her behalf to prevent unprofitable investment. This cap decreases as the conflict of interest between the investor and advisor widens and may be lower for a better-informed advisor. Although the investor always prefers a better-informed advisor, the advisor may choose to acquire less information to induce the investor to impose a higher cap. Reducing the conflict of interests between the investor and the advisor may not improve financial decisions, as it may discourage the advisor from acquiring more information. Our findings provide implications for policymakers seeking to regulate the delegated portfolio management industry, favoring better investment decisions.