The price of free advice

Abstract

What factors determine how well consumers make their actual choices with regard to financial products? This article empirically evaluates two different choices consumers make when buying deferred annuities. One choice concerns the type of insurance policy, the other concerns the choice of insurance provider. For both choices, we will analyse what factors explain the quality of the choice made. In particular, we will investigate the role of financial advice in the decision-making process. By combining Dutch consumer survey data and data on quotations by Dutch life insurance companies, we obtain the following results. First, respondents who buy their policy directly from an insurer attain a significantly better match between their risk preferences and the type of policy chosen than respondents who purchase their policy through an insurance broker. Second, respondents who buy their policy through an insurance broker obtain a significantly lower payout than respondents who purchased their policy directly from an insurance company. These results raise doubts about the functioning of both the market for financial advice and the market for life insurances.

The Making and Breaking of Trust in Pension Providers: An Empirical Study of Pension Participants

“…To illustrate the relevant hypotheses of drivers for the various pension providers, we carried out a simulation analysis (see Table 5) based on the ordered logit estimates of Table 4. van Dijk et al (2008). 29 A similar conclusion about banks can be found in Jansen et al (2015).…”

Why do older adults avoid seeking financial advice? Adviser anxiety in the Netherlands

“…Moreover, it became clear in 2006 that during the 1990s, many banks and insurance companies promoted investment-linked insurance and mortgage products, which turned out to be excessively expensive, and had unreasonably high commission fee structures (Commission Scheltema 2010: 116–22), which these financial intermediaries sought to obfuscate from their customers in difficult to understand disclosures or disclosures which were misleading (Authority for the Financial Markets 2008). As van Dijk, Bijlsma and Pomp (2008) have argued, the Dutch market for financial advice does not function properly and in a way that is generally fair to the consumer. Both low-income and high-income customers were prone to become entangled in the web of financial intermediaries as the cost of financial advice was never made explicit to customers or only made explicit once a deal was closed.…”

Customer intention to adopt a fee‐based advisory model

“…Clients of financial services often view financial advisors as their key source of information and seek their personal advice to reduce purchase risk (Beckett et al , 2000; Capon et al , 1996; Lee, 2002). Financial advisors are responsible for customer value creation by assessing and presenting personalized proposals to customers, reducing search costs and information asymmetries, and overcoming the sometimes weak self‐control of customers (Crosby et al , 1990; Eisingerich and Bell, 2006; Fandos Roig et al , 2006; Statman, 1999; Van Dijk et al , 2008). Nevertheless, considering the ambiguous nature of financial services and current industry characteristics, it remains challenging for clients to be certain whether their advisors act fair, independent and in their best interest, often even after receiving the advice (Davies, 1996).…”

“…Most of the criticism concerns the traditional commission‐based remuneration model, which is judged to be mostly profit‐driven and not always in the best interest of consumers (Commission of the European Communities, 2009; Federal Ministry of Food Agriculture and Consumer Protection, 2010; Financial Services Authority, 2010). Similarly, academics criticize the traditional coupling of product and consultation as principal‐agent problems may cause a “commission‐bias” (Maas and Graf, 2008; Van Dijk et al , 2008). This bias constitutes a threat to investors' wealth and raises doubts about the added value of financial advisors (Bergstresser et al , 2009; Van Dijk et al , 2008).…”

“…Similarly, academics criticize the traditional coupling of product and consultation as principal‐agent problems may cause a “commission‐bias” (Maas and Graf, 2008; Van Dijk et al , 2008). This bias constitutes a threat to investors' wealth and raises doubts about the added value of financial advisors (Bergstresser et al , 2009; Van Dijk et al , 2008). In sum, current market conditions give rise to rethink the existing commission‐based remuneration model to restore consumer trust, which is a fundamental premise for successfully providing financial services (Beckett et al , 2000; Branca, 2008; Cox, 2007; Tyler and Stanley, 2007).…”