What is the Impact of Financial Advisors on Retirement Portfolio Choices and Outcomes?

To measure the causal impact of broker recommendations on their clients portfolios, we exploit time-series variation in access to brokers in a defined contribution retirement plan. When brokers are available, we predict demand for brokers using administrative data on plan participants. The observed correlations with age, income, and educational attainment suggest that brokers are chosen by participants who need help with asset allocation and fund selection because they are less financially sophisticated. When brokers are no longer available, we show that demand for default investment options increases differentially among participants with the highest predicted demand for brokers. And, the increases are largest when the default is a target-date fund (TDF), which combines portfolio management with asset allocation. Therefore, we can use portfolios based on TDFs to determine how the broker clients in our setting would have invested in the absence of broker recommendations. We find that actual broker client portfolios earn significantly lower risk-adjusted returns and Sharpe ratios than the counterfactual portfolios—due in part to broker fees that average 0.90% per year—but offer similar levels of systematic risk. When we exploit across-fund variation in the level of broker fees, we find broker clients allocate more dollars to high-fee funds. This finding reinforces the fact that broker clients rely on broker recommendations, and it highlights one potential benefit of replacing brokers with TDFs. JEL classification: D14, G11, G23