MiFID II forces banks and wealth managers to ask clients for their investment knowledge and experience. The implied regulatory view is that less experience should result in less risk taking. While this is neither shared in theoretical nor in empirical finance, it becomes a source of legal risk for asset managers and banks. How do banks react? So far this question was impossible to answer. The relevant data have not been available as they are not shared by banks. We circumvene this problem by using publicly available portfolio recommendations from robo-advisory firms. These firms fall under the same regulations as banks and wealth managers with respect to MiFID II investor profiling and are often owned by traditional banks. It is therefore reasonable to assume that their treatment of investor experience is similar to traditional banks' approaches.
{"title":"Investor Experience and Portfolio Choice","authors":"B. Scherer, Sebastian Lehner","doi":"10.2139/ssrn.3828373","DOIUrl":"https://doi.org/10.2139/ssrn.3828373","url":null,"abstract":"MiFID II forces banks and wealth managers to ask clients for their investment knowledge and experience. The implied regulatory view is that less experience should result in less risk taking. While this is neither shared in theoretical nor in empirical finance, it becomes a source of legal risk for asset managers and banks. How do banks react? So far this question was impossible to answer. The relevant data have not been available as they are not shared by banks. We circumvene this problem by using publicly available portfolio recommendations from robo-advisory firms. These firms fall under the same regulations as banks and wealth managers with respect to MiFID II investor profiling and are often owned by traditional banks. It is therefore reasonable to assume that their treatment of investor experience is similar to traditional banks' approaches.","PeriodicalId":252294,"journal":{"name":"Household Financial Planning eJournal","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-04-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123482371","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Traditional forms of robo-advice were targeted to help individuals make portfolio allocation decisions. Based on the balance-sheet view of households, the scope for robo-advising has been expanding to many other personal-finance choices, such as households' saving and consumption decisions, debt management, mortgage uptake, tax management, and lending. This chapter reviews existing research on these new functions of robo-advising with a special emphasis on the questions that are still open for researchers across several disciplines. We also discuss the attempts to optimize jointly all personal-finance decisions, which we label ``holistic robo-advisors.'' We conclude by assessing fruitful avenues for research and practice in finance, computer science, marketing, decision science, information systems, law, and sociology.
{"title":"New Frontiers of Robo-Advising: Consumption, Saving, Debt Management, and Taxes","authors":"Francesco D’Acunto, Alberto G. Rossi","doi":"10.2139/ssrn.3778244","DOIUrl":"https://doi.org/10.2139/ssrn.3778244","url":null,"abstract":"Traditional forms of robo-advice were targeted to help individuals make portfolio allocation decisions. Based on the balance-sheet view of households, the scope for robo-advising has been expanding to many other personal-finance choices, such as households' saving and consumption decisions, debt management, mortgage uptake, tax management, and lending. This chapter reviews existing research on these new functions of robo-advising with a special emphasis on the questions that are still open for researchers across several disciplines. We also discuss the attempts to optimize jointly all personal-finance decisions, which we label ``holistic robo-advisors.'' We conclude by assessing fruitful avenues for research and practice in finance, computer science, marketing, decision science, information systems, law, and sociology.","PeriodicalId":252294,"journal":{"name":"Household Financial Planning eJournal","volume":"62 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123978882","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the use of “heartbeat trades” by ETFs in explaining their superior tax efficiency. By relying on the in-kind-redemption exemption rule, authorized participants help ETFs avoid distributing realized capital gains and reduce their tax overhang. In recent years, ETFs end up with 0.92% lower tax burden per year than active mutual funds, partly due to heartbeat trades. Challenged by ETFs’ tax efficiencies, mutual funds exhibit higher flow-tax sensitivity than flow-fee sensitivity. Active mutual funds with relatively higher tax burdens had more outflows from tax-sensitive investors at the same time when ETFs with similar investment styles experienced stronger inflows. Using holdings data of institutions with high-net-worth clients, we find that investment advisors with tax-sensitive investors allocate four times more assets to ETFs than other institutions, representing an important driver behind the overall surge in ETF flows, especially after the increase of capital gains tax rate in 2013. We conclude that the migration of flows from active mutual funds to ETFs is driven primarily by tax considerations.
{"title":"ETF Heartbeat Trades, Tax Efficiencies, and Clienteles: The Role of Taxes in the Flow Migration from Active Mutual Funds to ETFs","authors":"R. Moussawi, Ke Shen, Raisa Velthuis","doi":"10.2139/ssrn.3744519","DOIUrl":"https://doi.org/10.2139/ssrn.3744519","url":null,"abstract":"We study the use of “heartbeat trades” by ETFs in explaining their superior tax efficiency. By relying on the in-kind-redemption exemption rule, authorized participants help ETFs avoid distributing realized capital gains and reduce their tax overhang. In recent years, ETFs end up with 0.92% lower tax burden per year than active mutual funds, partly due to heartbeat trades. Challenged by ETFs’ tax efficiencies, mutual funds exhibit higher flow-tax sensitivity than flow-fee sensitivity. Active mutual funds with relatively higher tax burdens had more outflows from tax-sensitive investors at the same time when ETFs with similar investment styles experienced stronger inflows. Using holdings data of institutions with high-net-worth clients, we find that investment advisors with tax-sensitive investors allocate four times more assets to ETFs than other institutions, representing an important driver behind the overall surge in ETF flows, especially after the increase of capital gains tax rate in 2013. We conclude that the migration of flows from active mutual funds to ETFs is driven primarily by tax considerations.","PeriodicalId":252294,"journal":{"name":"Household Financial Planning eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128736600","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This brief uses data from the CFPB’s Making Ends Meet survey to explore consumers’ savings-related behaviors, experiences, and outcomes. We highlight the relationship between how much money people think they need in savings for emergencies and how much money they report actually having in their checking and savings accounts combined. Together, these two elements provide insight into consumers’ perceived financial preparedness. For many people, we observe a gap between what they think they need and what they have.
We also explore the relationship between saving and more objective measures of respondents’ financial situations, such as past experiences with financial shocks and difficulty paying bills—that is, making ends meet. We find that consumers who report their household’s monthly saving habit as “don’t save” (versus “save”) are more likely to report having difficulty paying bills in the past year, and this gap exists at all levels of income. We also find that when negative circumstances are compounded, consumers experience greater financial strain. Specifically, when consumers have less than they think they need for emergencies and they do not have a habit of saving, their financial well-being is particularly low and they are even more likely to report that finances control their lives. Similarly, consumers who experience a financial shock and do not have a habit of saving are more likely to have difficulty paying bills and other expenses. This research brief enhances the evidence base of the CFPB’s Start Small, Save Up initiative, which aims to promote the importance of building a basic savings cushion and saving habits among U.S. consumers as a pathway to increased financial well-being and financial security.
{"title":"Perceived Financial Preparedness, Saving Habits, and Financial Security","authors":"Cfpb Office of Research","doi":"10.2139/ssrn.3790588","DOIUrl":"https://doi.org/10.2139/ssrn.3790588","url":null,"abstract":"This brief uses data from the CFPB’s Making Ends Meet survey to explore consumers’ savings-related behaviors, experiences, and outcomes. We highlight the relationship between how much money people think they need in savings for emergencies and how much money they report actually having in their checking and savings accounts combined. Together, these two elements provide insight into consumers’ perceived financial preparedness. For many people, we observe a gap between what they think they need and what they have.<br><br>We also explore the relationship between saving and more objective measures of respondents’ financial situations, such as past experiences with financial shocks and difficulty paying bills—that is, making ends meet. We find that consumers who report their household’s monthly saving habit as “don’t save” (versus “save”) are more likely to report having difficulty paying bills in the past year, and this gap exists at all levels of income. We also find that when negative circumstances are compounded, consumers experience greater financial strain. Specifically, when consumers have less than they think they need for emergencies and they do not have a habit of saving, their financial well-being is particularly low and they are even more likely to report that finances control their lives. Similarly, consumers who experience a financial shock and do not have a habit of saving are more likely to have difficulty paying bills and other expenses. This research brief enhances the evidence base of the CFPB’s Start Small, Save Up initiative, which aims to promote the importance of building a basic savings cushion and saving habits among U.S. consumers as a pathway to increased financial well-being and financial security.","PeriodicalId":252294,"journal":{"name":"Household Financial Planning eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128683560","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Christian Kubitza, Annette Hofmann, Petra Steinorth
This paper studies insurance demand for individuals with limited financial literacy. We propose uncertainty about insurance payouts, resulting from contract complexity, as a novel channel that affects decision-making of financially illiterate individuals. Then, a trade-off between second-order (risk aversion) and third-order (prudence) risk preferences drives insurance demand. Sufficiently prudent individuals raise insurance demand upon an increase in contract complexity, while the effect is reversed for less prudent individuals. We characterize competitive market equilibria that feature complex contracts since firms face costs to reduce complexity. Based on the equilibrium analysis, we propose a monetary measure for the welfare cost of financial illiteracy and show that it is mainly driven by individuals' risk aversion. Finally, we discuss implications for regulation and consumer protection.
{"title":"Financial Literacy and Precautionary Insurance","authors":"Christian Kubitza, Annette Hofmann, Petra Steinorth","doi":"10.2139/ssrn.3346477","DOIUrl":"https://doi.org/10.2139/ssrn.3346477","url":null,"abstract":"This paper studies insurance demand for individuals with limited financial literacy. We propose uncertainty about insurance payouts, resulting from contract complexity, as a novel channel that affects decision-making of financially illiterate individuals. Then, a trade-off between second-order (risk aversion) and third-order (prudence) risk preferences drives insurance demand. Sufficiently prudent individuals raise insurance demand upon an increase in contract complexity, while the effect is reversed for less prudent individuals. We characterize competitive market equilibria that feature complex contracts since firms face costs to reduce complexity. Based on the equilibrium analysis, we propose a monetary measure for the welfare cost of financial illiteracy and show that it is mainly driven by individuals' risk aversion. Finally, we discuss implications for regulation and consumer protection.","PeriodicalId":252294,"journal":{"name":"Household Financial Planning eJournal","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124937587","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Individual investors, policy-makers, and members of the financial services industry are struggling to figure out how best to help individuals prepare for a financially secure retirement; namely, allowing individuals to continue their pre-retirement standard-of-living post retirement. We propose that an incorrect specification of the problem to be solved is leading, not surprisingly, to sub-optimal proposed solutions.1 When the retirement planning challenge is posed correctly, finance science suggests an elegantly simple solution - the creation of a simple new financial instrument that is a win-win-win for individuals, governments and the financial services industry.
{"title":"SeLFIES: A-New(-ity) Look for Retirement","authors":"A. Muralidhar, R. C. Merton, P. Hogan","doi":"10.2139/ssrn.3548324","DOIUrl":"https://doi.org/10.2139/ssrn.3548324","url":null,"abstract":"Individual investors, policy-makers, and members of the financial services industry are struggling to figure out how best to help individuals prepare for a financially secure retirement; namely, allowing individuals to continue their pre-retirement standard-of-living post retirement. We propose that an incorrect specification of the problem to be solved is leading, not surprisingly, to sub-optimal proposed solutions.1 When the retirement planning challenge is posed correctly, finance science suggests an elegantly simple solution - the creation of a simple new financial instrument that is a win-win-win for individuals, governments and the financial services industry.","PeriodicalId":252294,"journal":{"name":"Household Financial Planning eJournal","volume":"8 12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115317395","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Financial planning as an affluent college student has its challenges, but the consequences are ameliorated by familial support that is usually responsive to any sudden financial need. For low-income students struggling to meet basic needs, the stakes are higher and resources are far more limited. Budgeting becomes intellectually and emotionally strenuous when revenue fluctuates (e.g., erratic work hours or the seasonality of financial aid disbursements) and expenses seesaw (e.g., beginning of semester costs, car repairs, medical issues, etc.). With nearly two-thirds of college students in the Trellis Fall 2018 Student Financial Wellness Survey responding that they would have trouble getting $500 in cash or credit to meet an emergency within the next month, the margin for error appears slim (Klepfer et al., 2019). In the Trellis report, Studying on Empty: A Qualitative Study of Low Food Security Among College Students (Fernandez et al., 2019), we found that many students used food purchases as an indirect way to keep their budgets balanced, resulting in chaotic, unbalanced eating that jeopardized their success in school.
作为一个富裕的大学生，财务规划面临着挑战，但家庭支持通常会对任何突然的财务需求做出反应，从而改善其后果。对于那些努力满足基本需求的低收入家庭学生来说，风险更高，资源也要有限得多。当收入波动(例如，不稳定的工作时间或财政援助支付的季节性)和费用跷跷板(例如，学期开始的费用，汽车维修，医疗问题等)时，预算就会变得理智和情绪化。在Trellis 2018年秋季学生财务健康调查中，近三分之二的大学生回答说，他们很难在下个月内获得500美元的现金或信用卡来应对紧急情况，因此误差幅度似乎很小(Klepfer et al.， 2019)。在Trellis的报告《空中学习:大学生低食品安全的定性研究》(Fernandez et al.， 2019)中，我们发现许多学生使用食品购买作为保持预算平衡的间接方式，导致混乱，不平衡的饮食，危及他们在学校的成功。
{"title":"College Students and Mid-Month Eating Adjustments: Balancing Budgets Through Low Food Secure Behavior","authors":"J. Webster, A. Cornett, Carla Fletcher","doi":"10.2139/ssrn.3553937","DOIUrl":"https://doi.org/10.2139/ssrn.3553937","url":null,"abstract":"Financial planning as an affluent college student has its challenges, but the consequences are ameliorated by familial support that is usually responsive to any sudden financial need. For low-income students struggling to meet basic needs, the stakes are higher and resources are far more limited. Budgeting becomes intellectually and emotionally strenuous when revenue fluctuates (e.g., erratic work hours or the seasonality of financial aid disbursements) and expenses seesaw (e.g., beginning of semester costs, car repairs, medical issues, etc.). With nearly two-thirds of college students in the Trellis Fall 2018 Student Financial Wellness Survey responding that they would have trouble getting $500 in cash or credit to meet an emergency within the next month, the margin for error appears slim (Klepfer et al., 2019). In the Trellis report, Studying on Empty: A Qualitative Study of Low Food Security Among College Students (Fernandez et al., 2019), we found that many students used food purchases as an indirect way to keep their budgets balanced, resulting in chaotic, unbalanced eating that jeopardized their success in school.","PeriodicalId":252294,"journal":{"name":"Household Financial Planning eJournal","volume":"720 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122094817","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this chapter, we first discuss the limitations of traditional financial advice, which led to the emergence of robo-advising. We then describe the main features of robo-advising and propose a taxonomy of robo-advisors based on four defining dimensions: personalization, discretion, involvement, and human interaction. Building on these premises, we delve into the theoretical and empirical evidence on the design and effects of robo-advisors on two major sets of financial decisions, that is, investment choices (for both short- or long-term horizons) and the allocation if financial resources between spending and saving. We conclude by elaborating on five broadly open issues in robo-advising, which beget theoretical and empirical research by scholars in economics, finance, psychology, law, philosophy, as well as regulators and industry practitioners.
{"title":"Robo-Advising","authors":"Francesco D’Acunto, Alberto G. Rossi","doi":"10.2139/ssrn.3545554","DOIUrl":"https://doi.org/10.2139/ssrn.3545554","url":null,"abstract":"In this chapter, we first discuss the limitations of traditional financial advice, which led to the emergence of robo-advising. We then describe the main features of robo-advising and propose a taxonomy of robo-advisors based on four defining dimensions: personalization, discretion, involvement, and human interaction. Building on these premises, we delve into the theoretical and empirical evidence on the design and effects of robo-advisors on two major sets of financial decisions, that is, investment choices (for both short- or long-term horizons) and the allocation if financial resources between spending and saving. We conclude by elaborating on five broadly open issues in robo-advising, which beget theoretical and empirical research by scholars in economics, finance, psychology, law, philosophy, as well as regulators and industry practitioners.","PeriodicalId":252294,"journal":{"name":"Household Financial Planning eJournal","volume":"33 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-01-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125668048","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Biased recommendations from financial advisors often lead to suboptimal portfolios and unnecessary fees. The compensation contracts used in practice lack high-powered incentive alignment and are incapable of mitigating conflicts of interest. However, all is not lost; individuals can attenuate the agency cost by limiting their advisors' choices via discretion limits. In this paper, I characterize optimal discretion limits. I show that discretion limits resolve much of the agency conflict and that the mechanism is robust. The analysis provides novel recommendations for policy and practice.
{"title":"Financial Advice and Discretion Limits","authors":"S. Davies","doi":"10.2139/ssrn.2430938","DOIUrl":"https://doi.org/10.2139/ssrn.2430938","url":null,"abstract":"Biased recommendations from financial advisors often lead to suboptimal portfolios and unnecessary fees. The compensation contracts used in practice lack high-powered incentive alignment and are incapable of mitigating conflicts of interest. However, all is not lost; individuals can attenuate the agency cost by limiting their advisors' choices via discretion limits. In this paper, I characterize optimal discretion limits. I show that discretion limits resolve much of the agency conflict and that the mechanism is robust. The analysis provides novel recommendations for policy and practice.","PeriodicalId":252294,"journal":{"name":"Household Financial Planning eJournal","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-01-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131655689","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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