INTRODUCTION

Clients have different expectations and perceptions about their finances, particularly when it comes to their beliefs about the stock market. Depending on individual, behavioral, and psychological characteristics, some clients have pessimistic views about future possible stock market returns, while others are more optimistic. Investor sentiment, the tendency to hold beliefs about stock market performance (Baker & Wurgler, 2007), has been found to have profound influence on the decision-making process for investors, their portfolios’ performance, and the performance of the stock market itself (Chung et al., 2012; Fisher & Statman, 2000; Schmeling, 2009). Investor sentiment can be reflected in stock valuation (Shefrin & Statman, 1994) and unexpected or irrational valuations, which cannot be explained by traditional models and theories, can be influenced by investor sentiment (Barberis et al., 1998; DeBondt & Thaler, 1985).

Psychological factors that influence investor decisionmaking include stock market optimism and confidence. While optimism can have a positive effect on stock returns, overoptimism has been associated with negative impacts on investor stock performance (Puri & Robinson, 2007). Overoptimism is believing that one is more likely, or at less risk, to obtain a favorable outcome regardless of the likelihood of the favorable event occurring (Altman, 2014). There is evidence that highly optimistic investors make inferior financial decisions (Puri & Robinson, 2007).

Allowing a third-party, such as a financial advisor, to play a role in one’s financial and investment decisions can reduce overoptimism (Altman, 2014). Researchers have found that working with a financial professional can curb poor behavioral and financial decision-making (Grable & Joo, 2001; Marsden et al., 2011). Park and Yao (2016) posited that those who worked with financial professionals had more consistent financial risk attitudes and behaviors. In addition, those working with financial professionals were less likely to make impulsive decisions (Park & Yao, 2016). Financial planner use has led to increased financial confidence (Salter et al., 2010) and better investment outcomes (Lei & Yao, 2016). However, it is not evident whether using an investment advisor is associated with a more realistic view of future stock market returns. As such, the purpose of this paper is to investigate the association between working with an investment advisor and investors’ outlook on future market returns.

Literature Review

Factors Related to Seeking Financial Advice

According to the financial help-seeking framework (Grable & Joo,1999), differences exist between consumers who seek financial advice and those who do not. Research suggests that objective financial knowledge and subjective financial knowledge play a role (Grable & Joo, 1999; Grable & Joo, 2001). There is a positive association between objective financial knowledge, purchasing stocks (Van Rooij et al., 2011), and seeking financial assistance (Collins, 2012; Gentile et al., 2016; Grable & Joo, 2001; Seay et al., 2016). At the same time, the literature points to a positive association between low financial literacy and not seeking financial advice (Grable & Joo, 2001; Kramer, 2016). Therefore, those who have a good understanding of financial concepts are more likely to seek advice and, when they do, evidence shows that they stand to obtain greater benefits from that advice (Moreland, 2018).

Consumers who are older (Elmerick et al., 2002; White & Heckman, 2016), have higher incomes (Alyousif & Kalenkoski, 2017) and higher net worths (White & Heckman, 2016) are more likely to seek financial advice. In addition, more educated individuals (White & Heckman, 2016) and those with higher risk tolerance levels (Fan, 2020) are more likely to seek financial advice. Additional factors with a positive relationship with financial advice seeking include financial confidence (Fan, 2020; Kramer, 2016), financial stress (Lim et al., 2014), and trust (Martin et al., 2014; Reiter et al., 2021). Several studies have supported the idea that women are more likely to seek financial advice (Elmerick et al., 2002; Lim et al., 2014) and Black investors are more likely to seek financial advice (Hanna, 2011; Elmerick et al., 2002; White & Heckman, 2016).

Benefits of Working with A Financial Professional

Investors working with financial advisors have better portfolio diversification (Marsden et al., 2011), asset allocation (Winchester et al., 2011), and performance (Lei & Yao, 2016). Financial advice creates a sustained long-term investment outlook (Winchester et al., 2011) and leads to improved saving behavior (Kim et al., 2018), sustainable retirement spending (Harlow et al., 2020), and more appropriate income replacement (Harlow et al., 2020).

While professional advice is associated with tangible financial improvements, it also plays a role in improving the psychological well-being (Kim, 2003), increasing financial confidence (Marsden et al., 2011; Salter et al., 2010), and boosting financial satisfaction (Schmeiser & Hogarth; 2013). Investors who worked with a financial planner had more consistent risk attitudes and made less impulsive financial decisions (Park & Yao, 2016). Working with an investment advisor specifically has been shown to prevent emotional investing (Maymin & Fisher, 2011).

Investor Sentiment

Longo (2014, p. 507) described investor sentiment as the “feeling and emotion of investors”. More specifically, investor sentiment can be defined as the beliefs that investors have about future cash flows and investment risk which are influenced by market performance over a given period (Winchester et al., 2011). Investor optimism and pessimism, an aspect of investor sentiment, are consumer biases related to one’s psychological disposition that can explain a consumer’s investment decisions (Fabre & François-Heude, 2009). These terms can be defined as degrees of subjective overestimation or underestimation of an event occurring, regardless of the objective probability that the event will happen or of the consumer’s capability to make the event happen (Fabre & François-Heude, 2009). Optimism has been associated with positive actions such as better physical health, higher levels of coping, relationship satisfaction and life satisfaction, among other things (Asebedo & Seay, 2015; Yalçın, 2011). Optimism has also been attributed to positive financial outcomes (Capps et al., 2016; Lim et al., 2014).

While some optimism appears to be good for economic decision-making, too much optimism can result in suboptimal financial decisions (Puri & Robinson, 2007). Dawson (2017) found that optimism leads to an overestimation of success in entrepreneurship, while Puri and Robinson (2007) uncovered that extreme optimists were worse off than mild optimists or those who had more realistic expectations. Investor optimism can lead individuals to invest in specific stocks, rather than in well-diversified portfolios, and can lead to imprudent financial decision making (Puri & Robinson, 2007; Yeske & Buie, 2014). Highly optimistic individuals believe that they are less likely to fail than others, which increases their likelihood to take excessive financial risks compared to those who are more realistic (Altman, 2014; Yeske & Buie, 2014). However, there is evidence that these biases, when detrimental to one’s finances, can be mediated through financial planner assistance and education (Asebedo & Seay, 2015).