http://www.iaeme.com/IJM/index.asp 34 editor@iaeme.com
International Journal of Management (IJM)
Volume 9, Issue 6, November–December 2018, pp. 34–53, Article ID: IJM_09_06_004
Available online at
http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=9&IType=6
Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com
ISSN Print: 0976-6502 and ISSN Online: 0976-6510
© IAEME Publication
INVESTORS AND INVESTMENT CHOICES:
DETERMINANTS OF THE FINANCIAL
ADVISORS PERSUADING THE INVESTORS
AND THE ROLE PLAYED BY FINANCIAL
ADVISORS ON THE DECISIONS OF THE
INVESTORS
S Veena
Hindustan Institute of Technology and Science (Deemed to be University), India
ABSTRACT
There are many number of investment avenues with simple choices like
investments in banks deposits to complex investment avenues like investing in share
markets and others. The investor gets confused and sometimes misled with vast
amount of information available. In such a case, the investor may require a support
while searching for the information, evaluating the alternatives and finally deciding
the investment avenues. This support may be available from personal sources like
family members, friends or peers or from intermediaries like financial advisors. This
study makes an attempt to understand the support extended by financial advisors
through reviewing the various scholarly articles on financial advisors.
Key words: Financial advisors, personal characteristics, information search,
evaluation of alternatives, decision making, impact.
Cite this Article: S Veena, Investors and Investment Choices: Determinants of the
Financial Advisors Persuading the Investors and the Role Played by Financial
Advisors on the Decisions of the Investors. International Journal of Management,
9 (6), 2018, pp. 34–53.
http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=9&IType=6
1. INTRODUCTION
The objective of the article is to identify and understand the characteristics of a Financial
Advisor necessary to initiate a communication and the role played by the advisor in various
stages from information search, to evaluation of alternatives, to decision making from among
the alternatives and impact created by advisors in the minds of the investors.
S Veena
http://www.iaeme.com/IJM/index.asp 35 editor@iaeme.com
Methodology
The study is solely based on reviewing the various scholarly articles on financial advisors on
personal characteristics of the advisor, the role played by the advisors in information search,
evaluation of alternatives, decision making and their impact on the behavior of the investors‟
decisions.
Findings
The study, by reviewing various articles and from the research findings of various researchers,
has found out that the services of advisors would surely benefit the investors to a large extent,
helping them to make an optimal investment decision. The study also found out that the
investors with more income tend to utilize the services of financial advisors than with less
income investors.
Future Research
The study can be taken as a prelude for investors for utilizing the services of the advisors and
advantage that can be reaped. In future for the financial stability, the investors have to
necessarily seek the support of advisors.
2. LITERATURE REVIEW
Introduction
There has been a phenomenal change in the financial services sector and has led to a
development of large number of financial institutions coming out with large number of
investment products in savings, insurance, mutual funds, equities and commodities. At
present, the Indian economy is fast growing with high disposable income, and so has high
saving potential. The rapidly changing financial structure and its market with complexities
makes an individual investor, with such a high disposable income, confused and sometimes
even worrying as to choice of an investment, the amount of the investment and to gain
maximum profits out of such investments. Also the investor gets baffled with the choices as
he lacks the knowledge, skill and the time to spend for researching the avenues. Chater et
al.(2010), have informed in their paper, that consumers clearly struggle with understanding
investments, with very few able to identify the investments which would meet their
requirements or give them a best return.
Objective
The objective of the article is to identify and understand the characteristics of a Financial
Advisor necessary to initiate a communication and the role played by the advisor in various
stages from information search, to evaluation of alternatives, to decision making from among
the alternatives and impact created by advisors in the minds of the investors.
Methodology
The study is solely based on reviewing the various scholarly articles on financial advisors on
personal characteristics of the advisor, the role played by the advisors in information search,
evaluation of alternatives, decision making and their impact on the behavior of the investors‟
decisions.
Financial Advisors
Lowings and Thomas (2008), in their research conducted for FSA, found out that the
consumers did not consider themselves to be confident and their experience is limited to one
Investors and Investment Choices: Determinants of the Financial Advisors Persuading the Investors
and the Role Played by Financial Advisors on the Decisions of the Investors
http://www.iaeme.com/IJM/index.asp 36 editor@iaeme.com
off purchase. In such a situation, the investor has to depend on someone to make his choice
the most optimal one. Financial Services Consumer Panel (2008); In addition the increase in
income and wealth of some people adds to the need for more financial advice. Senthil
Mullainathan (2012), in his article, says that a variety of forces, from social interactions with
friends and family to advertising and media, can influence their choices. In a survey of retail
investors, Hung et. al. (2008) found that 73% of all individuals surveyed consult a financial
advisor before purchasing shares or mutual funds. Howcroft et al., (2003): Faced with a wide
range of product choices, research has indicated that investors seek to manage their
investments through the use of financial advisors. Lack of financial awareness, limited or no
access to financial information, their intricacy and the lawful and contracting requirements
makes an investor to approach the financial advisor for professional advice. Chater et al.,
(2010), in their research, have clearly indicated that financial advisors play sales and
execution roles, as well as their primary role of providing information and advice. Studies of
financial behaviour have concluded that financial education, counseling and advice might
help individuals engage in financial practices that support longer term financial security.
Various other studies have also iterated that advice of financial advisors improves investors‟
cognition and enhances the financial capability of the investors.(Collins, 2012).
Financial advisors, as the name suggests, take up the role of helping the investors in
analyzing the various investment avenues, educating them on pros and cons of various
investment avenues, helping them in making important financial decisions, realizing their
goals and dreams, meeting their obligations and finally achieving a peace of mind. The
financial advisor makes a detailed assessment of the investors‟ financial position based on
their goals and aspirations. They make recommendations by assessing and comparing the
range of products generally representing the whole market. The potential benefit of engaging
financial advisors is ultimately to increase the wealth, protect it from inflation and have a
smooth consumption. As such the financial advisors in this study refer to independent
advisors, and advisors with advisory firms. Senthil Mullainathan et al .,(2012) also feel that
that the investment market knows very little about the financial advisors, though their
presence is required for investment advice. Lowings et al.,(2008), in their report submitted to
FSA, has indicated that investors perceive financial advisors as professionally qualified, has
attained higher education, and has the knowledge to deal with large sums of money and so
there are quite trustworthy and professional. They continue to iterate that the consumers
choose their financial advisor based on their initial feelings about the advisor in terms of their
personality and approachability. The consumers tend to remain with the financial advisor, if
they feel that the advisor is right for them. The consumers regarded the advisor in the main
role when large sum of money is involved. Chalmers and Reuter (2011), are of the view that
as investors derive utility from the one-on-one relationship and their lower levels of financial
literacy make them value financial advisors. The opaque and inconsistent terminology in the
industry is however largely incomprehensible to the layman, and technical terms may mean
different things from different providers or different terms may describe the same feature
(Sandler, 2002). Martenson (2007) preferred consumers to turn to their financial adviser or
contact person for help to make better decisions. Angelova & Regner (2012), commence
their paper with the comment that, for most of the consumers the market for financial
products appear like a jungle. Hence, advice is required by the consumers and they turn to
expert intermediaries who provide advice of financial products. Vera Popova, (2010), in her
paper, initiates that a client hires an advisor and hopes to receive truthful advice. In a research
conducted among the German investors, it was found out that 80% of them consult a financial
advisor. In Europe, a vast majority of respondents have said that they trust the advisors and
their advice. Investors in Romania, the Chezh Republic and France are most likely to consult
a financial advisor. (Chater et al., 2010).
S Veena
http://www.iaeme.com/IJM/index.asp 37 editor@iaeme.com
Hilgert et al,(2003), in their paper, had confirmed that individuals have a preference for
television, radio, magazines and newspaper. Duflo & Saez 2002, found that individuals rely
on financial advice from friends and colleagues for making saving decisions. Vera Popova
(2010), in her paper initiates that in the financial market context, a client hires an advisor and
hopes to receive truthful advice. Many studies have concluded that the basic reason
individuals hired a financial advisor was that these professionals were more knowledgeable
than the client. Akerlof and Shiller (2009) go the extent of saying that the uninformed
financial decisions by investors were the reason for global financial crisis in 2008.
Montmarquette and Viennot (2012), in their paper, have found that advice improves the
investment process in each of the identified phases of decision making. In their research, they
have concluded that the investors who have had a financial advisor for almost 58% more
financial assets than those who do not have a financial advisor. They have also observed the
public opinion surveys commissioned by the financial services industry that those who seek
advice are those who are financially better off. The financial advisor is said to use CRM in
understanding and influencing consumer behaviour through meaningful communications in
order to improve customer acquisition, customer loyalty, and customer profitability. (Swift
2001).In a special report in the website, www.ssgafunds.com, it has been reported that an
investor generally seeks an advisor who is experienced and knowledgeable, one who can help
the investor make, or single handedly make on the investors‟ behalf, difficult financial and
personal decisions. Mckenna et al.,(2003) had quoted the words of Mary Rowland in
National Association of Personal Advisors meeting held on 1999, that the primary role of a
financial planner is to help clients overcome their personal dysfunctions and lead better and
more rewarding lives.
3. PERSONAL CHARACTERISTICS:
Personal characteristics play an enormous role in determining which of the market players
prevail. (Axel et al, 2010). Rajaobelina et al.,(2009), in their paper, Customer orientation is
being developed by the financial advisors and they are pretty sure that this is the indicator for
buyer-seller relationship. It is personality variable that the financial advisor reflects this
character while meeting the investors disposition
Communication
Jaffe et al, (2011), in their white paper, have iterated that, to draw relevant factual and
emotional information from the client and knowing how to handle it adeptly requires good
communication skills in every interaction. Listening truly to the clients, interviewing
effectively to make the client feel understood, managing the delicate issues that money can
evoke, are the potentials required for the most successful advisors. Jaffe et al.,(2011), in their
article, have described the five key generalist skills that form the foundation for good
interviewing and communication. a. good interviewing (conversation) with a client is a
process of discovery, with surprises and layers of experience. b. ability to speak directly and
honestly, to listen well in situations of stress or conflict, and to handle those crucial
conservations that need to occur. c. explaining the investment avenues in understandable
English to make the client educated and sends the message that “this is about you, the client –
your involvement, your understanding, and your comfort” d. passive listening is essential as
to understand what the client is talking about, receiving the client‟s words and feelings with
the eyes and ears of the great listener. e. advisors should be aware of their feelings whether
nervous, angry, confused or under attack and possess the skill to monitor themselves as these
reactions emerge and then to not let their feelings influence what they do. An important aspect
of being a financial advisor is that he understands the customers‟ needs, expectations and
concerns. McKenna (1995), in his article, talks about communication, where in the financial
Investors and Investment Choices: Determinants of the Financial Advisors Persuading the Investors
and the Role Played by Financial Advisors on the Decisions of the Investors
http://www.iaeme.com/IJM/index.asp 38 editor@iaeme.com
advisors initiate the dialogue by opening themselves to investors and also sustains it by
involving investors as partners for further process. While financial advisors communicate
with the investors, their tone of voice, friendliness and empathy can be experienced by the
investors. The role of a financial advisor in communication is that of a „harmonizer‟, who
brings harmony in the investments decisions of the investor. (Rogers et al., 1976).
The more the financial advisor communicates with the investors, their thoughts and
behaviours can be reinforced or preferably improved while deciding about the investments.
Croson (www.ssgafunds.com), in the special report, have insisted that the investors value that
communication which the financial advisor can tell them just enough about the subject.
Chater et al., (2010), in their research, have recommended that communication between
advisor and investor is effective, even for simple investment decisions, thereby increasing the
propensity of investors to follow recommendations.
Trust
Trust is the main component in the sustainable context. The literature has suggested that the
trust as one of the main components which play an important role in influencing the investors
to have business with the advisors. Kenneth Arrow,(1972), in his book, gave expressed trust
as follows: “Virtually every commercial transaction has within itself an element of trust,
certainly any transaction conducted over a period of time.” Sapienza and Zingales call Trust,
“as an asset, is crucial to the development of any nation. Without trust, cooperation breaks
down, financing breaks down and investment stops”. Notions of trust and trustworthiness can
be said to be important measures of the value of financial advisor. (Montmarquette et al
2012).Monti et al.,(2014), in their paper, has defined trust as “responsive behaviour‟,
indicating relational factors that define interpersonal relationships. In their research, they
asked their respondents to identify the factors that are instrumental in trusting the advisor and
the responses included the technical competency of the advisor, communication traits and
accessibility and overall environment of his work space.
Trust is a complex state that comes about because individuals do not know what the
motives and intentions of others are (Kramer, 1999). Riegelsberger et al (2003): Trust has
been described as a device to reduce complexity, a shortcut to avoid complex decision-
making processes when facing decisions that carry risk. Beckett (2000), has quoted thus: the
research reveals that in many instances trust is a personalized characteristic whereby
relationship is maintained between a reliable advisor and the investor. The Special report in
the www.ssgafunds.com has quoted the words of famous psychologist Dr. James Grubman
relating to trust thus: “If I tell you personal things about myself or my family, I need to trust
you, the advisor, the advisor will handle well”. Chater et al., (2010), have reported that the
investors completely trust the advisor and do not perceive the advisor to be biased. They have
also reported that the advisor manages the investors‟ emotions and thereby affects investors
willingness to trust. Advisors are positive, increasing their willingness to help the investors, to
cooperate and makes the other party to trust in negotiations. In a European Survey, it has been
concluded that the less educated households had trust financial advisors to decide on buying
stock or other risky and more sensitive collective investment products. (Georgarakos and
Inderst , 2010)
Gambetta, Diego (2000) define Trust: “When we say we trust someone or that someone is
trustworthy, we implicitly mean that the probability that he will perform an action that is
beneficial or at least not detrimental to us is high enough for us to consider engaging in some
form of cooperation with him”. They continue to iterate the definition of trust that the others
intention is not to cheat us but in their knowledge and skill to perform adequately over and
above their intentions. The investors‟ ignorance or uncertainty about the investment