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4 - Investment advice and product distribution

Published online by Cambridge University Press:  26 February 2010

Niamh Moloney
Niamh Moloney
Affiliation:
London School of Economics and Political Science
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Summary

Intermediation, its risks and regulation

The benefits of advice

The EC retail market is strongly characterized by intermediation in the form of investment advice and related investment product distribution services. Reliance on advisers, whether in the form of independent advisers or, more commonly, bank-based financial supermarkets, is significant. This reliance is in many respects inevitable and rational, and it can lead to stronger market engagement. Investment advice has an educational dimension. The adviser can counter decision-making defects and dilute deeply rooted biases, including framing effects, the status quo effect, the tendency to sell winners more quickly than losers and the home bias, which can drive poor diversification. Given that information-gathering represents a significant barrier to retail market entry, advice may improve market engagement in that information-gathering is outsourced to the adviser. Market risks may be contained where advice is sought and higher returns may follow; evidence from Germany and the UK suggests positive outcomes from advice.

The risks

But investors face a series of risks from advice services. The relationship between the service provider and the investor is characterized by often severe informational asymmetries and by limited investor competence. Retail investors are rarely in a position to monitor advisers effectively and have difficulties in assessing the quality of advice. Decision-making difficulties are exacerbated as adviser failures may not become apparent for some time and as retail investors are unlikely to gain experience as investment decisions tend to be irregular.

Type
Chapter
Information
How to Protect Investors
Lessons from the EC and the UK
 , pp. 192 - 287
Publisher: Cambridge University Press
Print publication year: 2010

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