Do Financial Advisors Exploit Responsible Investment Preferences?

Abstract

An unprecedented number of investors are giving their financial advisors a mandate for socially responsible investing (SRI). Yet, the impact of SRI mandates on consumers is unclear. In a pre-registered lab-in-the-field experiment with 345 professional advisors, we find that advisors charge a premium to SRI clients that cannot be justified by higher effort, skill, or costs. This suggests that advisors exploit the SRI preferences of their clients (who accept these higher fees). In an independent survey, financial regulators predict higher SRI fees but do not predict exploitation. Regulators confirm that our findings are externally valid and require attention from policymakers.

Do Investors Care about Impact?

“…Certainly, catering to investors' emotions is a business opportunity. Laudi, Smeets, and Weitzel (2021) provide experimental evidence that professional financial advisors actively exploit the sustainability preferences of their clients. In real settings, products may be marketed strategically in such a way that a sustainable product with relatively modest impact is presented as the sustainable option.…”

Conform to the norm. Peer information and sustainable investments

“…A growing stream of literature identifies non-pecuniary factors as drivers of sustainable investments, where retail investors derive utility from investing in line with their social preferences (Bia lkowski & Starks, 2016;Riedl & Smeets, 2017;Humphrey, Kogan, Sagi, & Starks, 2020;Bauer, Ruof, & Smeets, 2021;Heeb, Kölbel, Paetzold, & Zeisberger, 2023). Investors are willing to pay more for sustainable investments by accepting higher fees (Riedl & Smeets, 2017;Anderson & Robinson, 2022;Laudi, Smeets, & Weitzel, 2022) or by accepting lower expected returns (Barber, Morse, & Yasuda, 2021;Pástor, Stambaugh, & Taylor, 2022). In addition, previous studies have exposed an indication for a social norm that affects allocations to sustainable investment products (Hong & Kacperczyk, 2009).…”

Sustainable investment preferences and how they are delegated

“…A growing stream of literature identifies non-pecuniary factors as drivers of sustainable investments, where retail investors derive utility from investing in line with their social preferences (Bauer et al, 2021;Białkowski & Starks, 2016;Heeb et al, 2023;Humphrey et al, 2020;Riedl & Smeets, 2017). Investors are willing to pay more for sustainable investments by accepting higher fees (Anderson & Robinson, 2022;Laudi et al, 2022;Riedl & Smeets, 2017) or by accepting lower expected returns (Barber et al, 2021;Pástor et al, 2022). We identify the utility of aligning one's behavior with the planned actions of peers as another non-pecuniary factor driving sustainable investments.…”