Costly Portfolio Adjustment and the Delegation of Money Management

This paper investigates the theoretical impact of including two empirically-grounded innovations in a lifecycle portfolio choice model. The first innovation is a portfolio adjustment cost which employees face when managing their financial wealth rather than delegating the task to a professional money manager. When job-specific human capital is accumulated through learningby-doing, investing time in financial management imposes opportunity costs in terms of current and future human capital accumulation. The second innovation is the incorporation of agedependent efficiency patterns in financial decision making. These two innovations replicate observed inactivity in portfolio adjustment patterns, especially for younger and older employees. This framework also allows an analysis of the choice between managing one\u27s own money and delegating the task to a financial advisor. The calibrated model quantifies welfare gains that the delegation option can bring to the lifecycle setting

Contagious Runs in Money Market Funds and the Impact of a Government Guarantee

Despite a vast theoretical literature on contagious behavior of investors, little is known about its empirical evidence in a real financial crisis setting. This paper examines evidence for contagious runs in money market funds during the 2008 financial crisis, drawing on a rich data set tracking U.S. money market funds’ daily flows and their enrollment statuses in the Treasury Department’s Temporary Guarantee Program (TGP). Evaluating the positive externality effect from a peer fund’s enrollment in the TGP on non-enrolled funds, we show that panic-driven runs were contagious across funds. We find that funds’ stability due to their enrollment in the guarantee program spilled over and enhanced daily flows to a non-enrolled fund by $1.8 million compared to already-enrolled funds. Moreover, we find that retail investors were less likely than institutional investors to return to prime money market funds even after enrollment in the guarantee program, implying that the latter benefited more from the government back-stop. Results are germane to policies seeking to rebuild investor confidence in times of financial crises and reduce the chance of future contagion in this industry

Time is Money: Life Cycle Rational Inertia and Delegation of Investment Management

We investigate the theoretical impact of including two empirically-grounded insights in a dynamic life cycle portfolio choice model. The first is to recognize that, when managing their own financial wealth, investors incur opportunity costs in terms of current and future human capital accumulation, particularly if human capital is acquired via learning by doing. The second is that we incorporate age-varying efficiency patterns in financial decisionmaking. Both enhancements produce inactivity in portfolio adjustment patterns consistent with empirical evidence. We also analyze individuals’ optimal choice between self-managing their wealth versus delegating the task to a financial advisor. Delegation proves most valuable to the young and the old. Our calibrated model quantifies welfare gains from including investment time and money costs, as well as delegation, in a life cycle setting

How Cognitive Ability and Financial Literacy Shape the Demand for Financial Advice at Older Ages

We investigate how cognitive ability and financial literacy shape older Americans’ demand for financial advice. Using an experimental module at the Health and Retirement Study, we show that cognitive ability and financial literacy strongly improve the quality but not the quantity of financial advice sought: more financially literate and cognitively able seek financial help from professionals. They also utilize more ‘free’ financial advice that may entail potential conflicts of interest. Finally, among those not seeking financial advice, people with higher cognitive function tend to distrust financial advisors, leading them to avoid these services

Choosing a Financial Advisor: When and How to Delegate?

Using a theoretical life cycle model, we evaluate how much workers benefit from having the option to hire a financial advisor when it is costly for employees to rebalance their own financial portfolios. Results indicate that having access to a financial advisor at the start of one’s career can be quite beneficial. If delegation to an advisor is available only a decade after entering the labor market, the benefit of delegation is cut by half, and it falls further if delegation is available only later in life (at age 60). We also examine whether simpler target date funds (TDF) and fixed-weight portfolios benefit consumers, compared to the outcomes with customized financial advice. We show that the simpler portfolio products would need to be provided at zero cost, in order to benefit consumers as much as having access to a financial advisor

Time is Money: Rational Life Cycle Inertia and the Delegation of Investment Management

Many households display inertia in investment management over their life cycles. Our calibrated dynamic life cycle portfolio choice model can account for such an apparently ‘irrational’ outcome, by incorporating the fact that investors must forgo acquiring job-specific skills when they spend time managing their money, and their efficiency in financial decision making varies with age. Resulting inertia patterns mesh well with findings from prior studies and our own empirical results from Panel Study of Income Dynamics (PSID) data. We also analyze how people optimally choose between actively managing their assets versus delegating the task to financial advisors. Delegation proves valuable to both the young and the old. Our calibrated model quantifies welfare gains from including investment time and money costs as well as delegation in a life cycle setting

How Cognitive Ability and Financial Literacy Shape the Demand for Financial Advice at Older Ages

We investigate how cognitive ability and financial literacy shape older Americans’ demand for financial advice. Using an experimental module at the Health and Retirement Study, we show that cognitive ability and financial literacy strongly improve the quality but not the quantity of financial advice sought: more financially literate and cognitively able seek financial help from professionals. They also utilize more ‘free’ financial advice that may entail potential conflicts of interest. Finally, among those not seeking financial advice, people with higher cognitive function tend to distrust financial advisors, leading them to avoid these services

The Impact of Shrouded Fees: Evidence from a Natural Experiment in the Indian Mutual Funds Market

We study a natural experiment in the Indian mutual funds sector that created a 22-month period in which closed-end funds were allowed to charge an arguably shrouded fee, whereas open-end funds were forced to charge entry loads. Forty-five new closed-end funds were started during this period, collecting $7.6 billion US, whereas only two closed-end funds were started in the 66 months prior to this period, collecting$42 billion US, and no closed-end funds were started in the 20 months after this period. We estimate that investors lost and fund firms gained approximately $350 million US due to this shrouding. (JEL D14, G23, G28, O16)