To Trust is Good, But to Control is Better : How Investors Discipline Financial Advisors' Activity

Using a survey of clients from one of the largest Italian banks, we find that investors with low level of trust in professional advisors seek financial counselling, but make their decisions autonomously. We investigate whether these investors exert some form of control over the quality of the recommendations they receive, and, if so, which one. Half of these investors do not exert any form of control over the advisor's activity. The investors who are more likely to control the quality of the advice received are those with high self-assessed financial competence. The mechanism through which investors discipline advisors depends instead on the investors' degree of test-based financial literacy. Investors with high financial literacy directly monitor the advisors' activity themselves. Instead, investors with low financial literacy are more likely to seek a second expert's opinion that supports the recommendations previously received, such as in the case of credence services. Our findings suggest that improving investors financial knowledge may foster direct control of the advisor's activity. Moreover, facilitating the comparison between financial products by standardizing and centralizing the information may be very effective to protect poorly literate investors