New Regulation Could Actually Reduce Access to Investment Advice

From: RegBlog | Penn Program on Regulation


To examine the value of professional investment advice, Professor Wilkinson-Ryan, Kristin, and I recently conducted a study of retail investor retirement decision-making. Our study simulated the process by which an ordinary employee selects among the options in a typical 401(k) plan. We asked subjects to allocate a $10,000 investment among ten investment alternatives based on real-world options, with the goal of maximizing the value of that retirement portfolio at the end of thirty years. We then used an algorithm to simulate the performance of the subjects’ portfolios at the end of thirty years. Using subjects from Amazon Mechanical Turk—an online platform that enables researchers to recruit and pay subjects for performing tasks such as responding to questionnaires or surveys—we sought to determine the financial literacy of ordinary retail investors and to ascertain the relationship between financial literacy and investment performance.


Most significantly, the professional advisers, unlike the ordinary investors, recognized that appropriate asset allocation was a key component of retirement investing, and they correctly identified and rejected inferior investment options. The knowledge gap resulted in a substantial and measurable performance difference between groups; the average value of the portfolio selected by the professional adviser, as calculated by our simulation, exceeded the average portfolio selected by the less financially literate ordinary investors by a third. In fact, these results likely understate the full value of professional investment advice; other research has demonstrated that more people participate in retirement plans and contribute more money to those plans when they have access to professional advice.

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