Out-of-pocket vs. out-of-investment in financial advisory fees: Evidence from the lab

Yevgeny Mugerman*, Orly Sade, Eyal Winter

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

The implications of the method of payment to financial advisors on the behavior of individuals are of interest to economists and regulators around the globe. This paper uses an experimental approach to compare two common alternative forms of payment. The first is “out-of-pocket” (an upfront payment from a checking account), and the second is “out-of-investment” (a deferred payment from an investment portfolio account). We document that for the same financial advice, the subjects in the first treatment were willing to pay on average 25 per cent less than the subjects in the second treatment – payment following an investment outcome knowledge, where the payment was framed in terms of gains. We introduce an additional out-of-pocket payment structure where the actual payment is deferred until after the subject discovers the outcome of the investment. Thus, the design can be broken down into two distinct possible effects, an out-of-pocket vs. out-of-investment framing effect and a pre-outcome vs. post-outcome timing effect. We find that the timing effect is the key element: across out-of-pocket payment structures, the subjects were willing to pay significantly less in the pre-outcome treatment than their counterparts were in the post-outcome treatment. Our results highlight the difference between post-service and pre-service payments in a broader context, and provide an explanation for why allowing late payment, after the service has been performed and its outcome revealed, may increase the ex-ante willingness to pay for the service.

Original languageAmerican English
Article number102317
JournalJournal of Economic Psychology
Volume81
DOIs
StatePublished - Dec 2020

Bibliographical note

Funding Information:
We acknowledge helpful comments and suggestions by two anonymous referees and the responsible editor (Carlos Alos-Ferrer). Additionally, we are grateful for comments on previous versions made by Angela Fontes, Assaf Hamdani, Mark Lush, Ori Putterman, Brian Scholl, Stefan Trautmann, Yishay Yafeh as well as by seminar participants at the Israeli Ministry of Finance, the Bank of Israel, and the Law & Finance workshop at the Hebrew University. We also thank participants of the North American ESA-SEF Conference (2017), 2018 ESA–Berlin, and 2018 Heidelberg University Experimental Finance Conference. This project was supported by the Israel Science Foundation (grant no. 1929/17 ), the Krueger Center of Finance at the Hebrew University (Sade), and the Israeli Prime Minister’s Office. Sade thanks the Stern School of Business at New York University for support and hospitality. The full data frame can be downloaded from the link reported here .

Funding Information:
We acknowledge helpful comments and suggestions by two anonymous referees and the responsible editor (Carlos Alos-Ferrer). Additionally, we are grateful for comments on previous versions made by Angela Fontes, Assaf Hamdani, Mark Lush, Ori Putterman, Brian Scholl, Stefan Trautmann, Yishay Yafeh as well as by seminar participants at the Israeli Ministry of Finance, the Bank of Israel, and the Law & Finance workshop at the Hebrew University. We also thank participants of the North American ESA-SEF Conference (2017), 2018 ESA?Berlin, and 2018 Heidelberg University Experimental Finance Conference. This project was supported by the Israel Science Foundation (grant no. 1929/17), the Krueger Center of Finance at the Hebrew University (Sade), and the Israeli Prime Minister's Office. Sade thanks the Stern School of Business at New York University for support and hospitality. The full data frame can be downloaded from the link reported here.

Publisher Copyright:
© 2020 Elsevier B.V.

Keywords

  • Advisor remuneration
  • Lab experiment
  • Payment structure
  • Post-service and pre-service payments
  • Willingness to pay

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