When and How to Delegate? A Life Cycle Analysis of Financial Advice

Hugh Hoikwang Kim, Raimond Maurer, and Olivia S. Mitchell

Abstract — 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.
Keywords: Portfolio inertia, life cycle saving, household finance, human capital, financial advice
JEL classifications: G11, D14, D91