An investor’s characteristics define the portfolio recommendations financial advisers give them. According to a study of financial advisers of millionaire clients, though, at least as important are the characteristics of the advisers, which cause recommendations to greatly vary.

Using fictional investor profiles designed with certain influential client variables, the authors found that advisers disagreed about how much investment knowledge and control should be attributed to the exact same investor.

When it came to recommendations, three adviser characteristics were found to be robustly related: existing client base, experience and age. Gender was not found to be significant.

Advisers with a higher proportion of millionaire clients made higher risk recommendations, while advisers accustomed to less wealthy clients were more conservative. This was attributed to the exposure of an adviser to wealthier clients’ higher risk tolerance.

Experience and age, though related, diverged in relation to risk. Older advisers recommended less risky portfolios than their younger peers. But advisers at the higher end of experience, more than 18 years, gave higher risk recommendations than those with less experience.

Despite the variance in advisers’ judgments toward their clients’ investment knowledge and control, the study found that advisers used investor characteristics in straightforward ways—corresponding with standard finance theory—when giving recommendations.

Predictably, older investors were recommended less risky portfolios, on average, while more experienced and wealthier investors were recommended higher-risk portfolios and were also judged to have more knowledge and control of their investments.

Interestingly, advisers were found to only boost risk for investors with higher-than-average levels of investment experience. Risk was not cut below a basic level by the perception of a client’s total inexperience.

The effect of dependents was found to be an important investor characteristic. Those with dependents were judged to be less knowledgeable and to have less control over their investments but were recommended higher-risk allocations.

The authors found this effect of dependents difficult to interpret, though it was noted to be large.

There was also a particular variance according to the gender of the fictional investor. Women were judged to be less knowledgeable and have less control of their investments relative to their identical male investor. However, at the millionaire level, there was not an economically substantial difference in portfolio recommendations.

Although millionaire women were judged differently from identical millionaire men, they were not advised to invest differently. The study suggests that gender bias toward investment recommendations attenuates with higher wealth, despite an adviser’s judgments on knowledge and control.

Source: “Variations in Investment Advice Provision: A Study of Financial Advisors of Millionaire Investors,” by Ylva Baeckstrom, Ian W. Marsh and Jo Silvester; SSRN, November 2018.