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Do overconfident investors seek professional investment advice?
Overconfident investors were found to be more likely to seek recommendations from financial advisors but less likely to hand over trading discretion.
Oct 31, 2024
2 minute read
2 minute read
Key takeaways:
- Our survey revealed a positive relationship between overconfidence and relying on advice to make investment decisions but found that overconfident investors were less likely to grant trading discretion to a financial professional.
- Advisors should attempt to assess potential clients’ level of confidence and be prepared to temper the suboptimal behaviors that tend to be common among highly confident investors.
- Furthermore, advisors may want to hold off on offering discretionary investment services to overconfident clients until an appropriate level of trust is reached.
Why did we do this research?
Some of today’s investors display overconfidence, defined as the belief that they know more than they actually do. The topic under investigation was whether overconfident investors seek professional advice, and if they do, what type of relationship they prefer with their advisor.
Why is this research important?
The study of overconfidence is important because this mindset has been linked to suboptimal investment behaviors such as excessive trading, market timing, and a lack of diversification within portfolios. If individuals do not rely on professional advice, then the industry must find alternative ways to help these investors make better decisions. On the other hand, if these individuals do use professional advice, advisors need to understand their preferences for working together.
What did we learn?
Among a sample of 1,203 U.S. adults, overconfident investors were more likely than other investors to make investment decisions based on a professional’s recommendation. While this result may seem counterintuitive, asking for help requires a high degree of self-confidence. We also found that while overconfident investors rely on professional advice, they are less likely to grant their advice trading discretion compared to other investors.
What are the takeaways for clients?
Overconfident investors are likely to use a financial advisor but want to retain the last word when it comes to investment decisions. Advisors who run discretionary, fee-based businesses may need to initiate relationships with overconfident investors with a traditional brokerage account. As trust builds over time, these investors may grow more comfortable with the prospect of relinquishing investment control to their advisor.
Source: Sommer, M., & Lim, H. (2022). Financial knowledge and the relationship with using professional investment advice and granting trading discretion. Journal of Personal Finance, 21(1), 62-77.
Oct 31, 2024
2 minute read
2 minute read
Key takeaways:
- Our survey revealed a positive relationship between overconfidence and relying on advice to make investment decisions but found that overconfident investors were less likely to grant trading discretion to a financial professional.
- Advisors should attempt to assess potential clients’ level of confidence and be prepared to temper the suboptimal behaviors that tend to be common among highly confident investors.
- Furthermore, advisors may want to hold off on offering discretionary investment services to overconfident clients until an appropriate level of trust is reached.