The Economics of Information in the Search for Financial Planners

Abstract

The theory of the economics of information posits that consumers will engage in a search for additional information so long as they anticipate that the marginal utility of doing so will yield a more optimal economic outcome, e.g., that they will obtain a better price for goods or services. In turn, sellers of products and services may utilize signals such as advertising and price to enhance the amount of business they do, whether by attracting additional customers or sending strong enough price signals to reduce the marginal utility of additional searches by consumers. Financial planners benefit from a significant information asymmetry between themselves as sellers of their services and consumers as their potential clients, as they are known as credence claim providers; those service providers whose service is difficult to ascertain the quality or value of before engaging in their services, and the results thereof are difficult to clearly attribute to the services performed. Because of this, consumers have difficulty determining the value of a financial planner both before and after engaging with a financial planner, making the search for quality signals difficult. Financial planners will regularly market their services using all-encompassing terms such as “comprehensive” and “holistic” but often offer a variety of services that may differ dramatically from financial planning firm to financial planning firm and even planner to planner within that firm. Additionally, many financial planners receive commissions for the sale of investment or insurance products that may not be explicitly known to the buyer of those products, or use a blend of explicit fees and less obvious commissions to generate revenue, which leads to greater difficulty for consumers attempting to compare their total costs with the total value received from a financial planner’s services. Utilizing primary data gathered from an online sample, this dissertation aims to examine how transparency of price and services benefits consumers in the process of selecting a financial planners. Also examined are what consumers consider the optimal blend of cost, services, and consumer preferences for transparency of fees and services. The results of the study suggest that information plays very little role in influencing the net costs of financial planning services or the selection of a financial planner based on the quantity or type of services offered. Despite clear data on both price and services, those with perfect information in the study did not obtain statistically significant advantages in pricing or services. Conversely, those who had only pricing data engaged in more information search and still did not obtain preferable pricing, and those with only services data did not use the services data available to them to produce any noticeable trend in the quantity or type of services received. Further, the study found that many consumers of financial planning services will opt for the first planner they research, rather than engaging in additional search for information for more optimal price or value considerations. This suggests that while financial planning professionals and those involved in the marketing of financial planning services may hold strong views about price and service transparency, members of the public are not significantly affected by the availability of either, and that obfuscation of either piece of information may not materially disadvantage consumers of financial planning services, at least insofar as how they opt to select a specific financial planner.