25.05.2019 Prof. Dr. Stolper awarded 2019 research prize of the Department of Business and Economics

Best Paper Award 2019 for Prof. Dr. Stolper

Prof. Dr. Stolper has been awarded the department’s research prize for the study "Birds of a Feather: The Impact of Homophily on the Propensity to Follow Financial Advice".

The study is joint work with Prof. Dr. Walter (holder of the Chair for Financial Services at Gießen University) and was published in the the Top-3 finance journal Review of Financial Studies (A+). The project is the first to analyze the role of homophily ("birds of a feather flock together") in the context of financial advice. Clearly, advisors’ recommendations—however beneficial they might be—do not translate into informed financial decisions if clients do not act on them. So what makes people follow financial advice once they have sought it?

It seems that demographic similarities between clients and their financial advisors make a difference. This is because people simply feel more comfortable with people like them. Sameness leads to mutual understanding in all kinds of personal relationships ranging from marriage and friendship to professional interactions.

Prof. Dr. Stolper and Prof. Dr. Walter have analyzed nearly 2,400 advisory meetings and observe a meaningful difference of 8.8 percentage points in clients’ likelihood of following the recommendations they have received when we compare interactions between clients and advisors exhibiting the highest versus lowest number of demographic similarities.

The effect of sameness is not the same for all clients, though. Men are more likely to follow the advice of other men if they’re the same age. By contrast, women are more likely to follow advice from other women only when their financial advisors have the same marital and parental status (married women with children are much more likely to follow the advice of financial advisors who are also married mothers). Moreover, financial knowledge matters: clients are more likely to following financial advice only if there is a considerable knowledge gap between the client and the advisor. Last but not least, the effect of sameness on following advice washes out once clients learn more about their advisors. Demographic similarities become increasingly irrelevant the longer clients and advisors work together.

Clients’ implementation of financial advice can be explained in large part by how they perceive the interaction with their advisors rather than rational considerations about whether the recommendations actually suit their needs. Thus, client-advisor matching based on similarities can harness the effect that demographically closer people benefit from easier mutual understanding. At the same time, however, the fact that sameness fosters interpersonal trust formation independent of fundamentals makes people vulnerable. It would be easy for unregulated advisors to exploit this in their own interest.