Table 2. Multinomial Logit Results - Investor Stock Market Outlook (Continued)

Note. OR = odds

Realistic-Optimistic = 10 - 14.9% ; Highly Optimistic = 15% or greater

*** is significant at the 1 percent level; ** is significant at the 5 percent level; and * is significant at the 10 percent level.

DISCUSSION & IMPLICATIONS

The purpose of this study was to investigate the association between professional investment advisor and investors’ outlook on the stock market. Results showed that those who had some form of professional assistance when making financial decisions, were more likely to be cautious-realistic and realistic-optimistic about future stock market performance. The key implication is that working with a financial professional rather is associated with having a more realistic view of future stock market returns.

One explanation for this relationship is that investors who work with professionals have access to education and coaching about the financial markets. For example, some clients are not aware of the average historical performance for different asset classes and as a result, do not understand what to expect for long-term returns (Evensky et al., 2011). Financial professionals f-provide education related to market volatility and market performance as a part of their financial planning process. This type of education is beneficial to the client and to the financial professional, as realistic expectation setting makes the relationship more stable in times of volatile markets (Evensky et al., 2011; Gibson, 2013). This is because clients’ expectations are realistic they can better understand investment strategies and associated performance in their own portfolios. When clients are coached and educated on important topics, there is the possibility to improve client-advisor communication and strengthen the professional bond between client and advisor (Dubofsky & Sussman, 2010).

Investor knowledge was also important in determining investor outlook in the current study. Those who were more knowledgeable about investment concepts were more likely to have realistic expectations of future stock market performance. This finding complements previous research linking financial advice and objective financial knowledge (Gentile et al., 2016), although Kramer (2016) did not find this association. Hirschleifer (2001) asserted that many cognitive biases, such as investor optimism, are more pronounced in consumers with low cognitive abilities when compared to consumers with high cognitive abilities. As such, respondents with lower levels of objective investment knowledge are more bound in their ability to adequately project future market performance. On the other hand, when assessing subjective investment knowledge, results show that there is a correlation between rating oneself highly and being highly optimistic about the market. Having high subjective financial knowledge can be interpreted as being confident or even overconfident. Research has shown that higher levels of subjective financial knowledge is associated with seeking financial help less often (Gentile et al., 2016; Kramer, 2016) and a higher likelihood to undertake risky financial behaviors (Tokar Assad, 2015).

Comfort, which can be interpreted as another proxy for confidence, was also associated with the investor being more likely to have a highly optimistic outlook of the market. Interestingly, investors who have high confidence are less likely to seek financial advice compared to other investors (Broekema & Kramer, 2021; Lewis, 2019) and are often selfdirected (Hsu, 2021). In addition, overconfidence is often seen as irrational because it has been linked to significant losses (Pitters & Oberlechner, 2014), lack of diversification (Broekema & Kramer, 2021) and excessive trading (Barber & Odean, 2000). In addition, high risk tolerance, which is sometimes attributed to higher financial knowledge (Grable, 2016), rather than low risk tolerance, was also an indicator of being less likely to have a pessimistic view of the stock market. Research shows that those who have higher risk aversion have lower expectations about stock market performance (Lee et al., 2015). High risk tolerance, rather than low risk tolerance, was also attributed to an investor believing that their portfolio would outperform the market. While age was not statistically significant when considering investor outlook on the market overall, results showed that being in a younger age cohort decreased the likelihood of investors believing that their own portfolio would outperform the market.

Limitations

There are a few limitations with this study. The dependent asked investors, “What do you expect the approximate average annual return of the S&P 500 stock index to be over the next 10 years (without adjusting for inflation)?” They were provided with many choices, but based on historical data, either 5% to 9.9% or 10% to 14.9% would be a realistic answer given that sources typically report a figure between 9-13% for the S&P 500 average. However, both responses include answers which are less accurate. For example, 5%, which could be considered low and pessimistic, or 14.9%, which could be considered high and highly optimistic, do not best reflect past average performance of the S&P 500. Because these answer choices were precategorized in the dataset, there was not much flexibility in determining the categories. Future research may use different data to identify investors’ perceptions of future stock market returns more accurately.

Conclusion

Using the 2015 National Financial Capability state-by-state and investor surveys, this study examined the associations between working with an investment advisor and investors’ outlook on the stock market. Results showed that investors who used an investment advisor when making their financial decisions were more likely to be realistic about stock market performance. The key implication is that working with a financial professional rather than being self-directed is associated with clients having a more realistic outlook of future stock market returns.

References

Altman, M. (2014). Behavioral economics, thinking processes, decision making, and investment behavior. In H. K. Baker & V. Ricciardi (Eds.), Investor behavior: The psychology of financial planning and investing (pp. 43-61). Wiley.

Alyousif, M. H., & Kalenkoski, C. M. (2017). Who seeks financial advice? Financial Services Review, 26(4), 405–432.

Asebedo, S., & Seay, M. C. (2015). From functioning to flourishing: Applying positive psychology to financial planning. Journal of Financial Planning, 28(11), 50-58.

Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of Economic Perspectives, 21(2), 129-152.

Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. The Journal of Finance, 55(2), 773-806.

Barberis, N., Shleifer, A., & Vishny, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49(3), 307-343.

Bogle, J. C. (2016). The index mutual fund: 40 years of growth, change, and challenge. Financial Analysts Journal, 72(1), 9–13. https://doi.org/10.2469/faj.v72.n1.5

Broekema, S. P., & Kramer, M. M. (2021). Overconfidence, financial advice seeking and household portfolio underdiversification. Journal of Risk and Financial Management, 14(11), 553.

Capps, G., Koonce, L., & Petroni, K. R. (2016). Natural optimism in financial reporting: A state of mind. Accounting Horizons, 30(1), 79-91.

Collins, J. M. (2012). Financial advice: A substitute for financial literacy?. Financial Services Review, 21(4), 307.

Chung, S. L., Hung, C. H., & Yeh, C. Y. (2012). When does investor sentiment predict stock returns?. Journal of Empirical Finance, 19(2), 217-240.

Dawson, C. (2017). Financial optimism and entrepreneurial satisfaction. Strategic Entrepreneurship Journal, 11(2), 171-194.

Dubofsky, D., & Sussman, L. (2010). The bonding continuum in financial planner-client relationships. Journal of Financial Planning, 23(10), 66-68,70,72,74,76-78.

Elmerick, S., Montalto, C., & Fox, J. (2002). Use of financial planners by U.S. households. Financial Services Review, 11, 217-231.

Evensky, H., Horan, S. M., & Robinson, T. R. (2011). The new wealth management: The financial advisor’s guide to managing and investing client assets. John Wiley & Sons, Inc.

Fabre, B., & François-Heude, A. (2009). Optimism and overconfidence investors’ biases: A methodological note. Finance, 30(1), 79119.

Fan, L. (2020). Information search, financial advice use, and consumer financial behavior. Journal of Financial Counseling and Planning 32(1), 21–34.

Fisher, K. L., & Statman, M. (2000). Investor sentiment and stock returns. Financial Analysts Journal, 56(2), 16-23.

Gentile, M., Linciano, N., & Soccorso, P. (2016). Financial advice seeking, financial knowledge and overconfidence. Evidence from Italy, Consob Research Papers, 83.

Gibson, R. C. (2013). Asset allocation: Balancing financial risk. McGraw-Hill Education, LLC.

Grable, J. E., & Joo, S. (1999). Financial help-seeking behavior: Theory and implications. Journal of Financial Counseling and Planning, 10(1), 14-25.

Grable, J. E., & Joo, S. (2001). A further examination of financial help-seeking behavior. Journal of Financial Counseling and Planning, 12(1), 55-73.

Grable, J. E. (2016). Risk tolerance. In J.J. Xiao (Ed.) Handbook of consumer finance research (pp. 19-31). Springer.

Hanna, S. D. (2011). The demand for financial planning services. Journal of Personal Finance, 10(1), 36-62.

Harlow, W. V., Brown, K. C., & Jenks, S. E. (2020). The use and value of financial advice for retirement planning. The Journal of Retirement, 7(3), 46-79.

Hsu, Y. L. (2021). Financial advice seeking and behavioral bias. Finance Research Letters, 102505.

Kim, K. T., Pak, T. Y., Shin, S. H., & Hanna, S. D. (2018). The relationship between financial planner use and holding a retirement saving goal: A propensity score matching analysis. Financial Planning Review, 1(1-2), e1008.

Kramer, M. M. (2016). Financial literacy, confidence and financial advice seeking. Journal of Economic Behavior & Organization, 131, 198-217.

Lee, B., Rosenthal, L., Veld, C., & Veld-Merkoulova, Y. (2015). Stock market expectations and risk aversion of individual investors. International Review of Financial Analysis, 40, 122-131.

Lei, S., & Yao, R. (2016). Use of financial planners and portfolio performance. Journal of Financial Counseling and Planning, 27(1), 92108

Lewis, M. B. (2019). An exploration of overconfidence in the utilization of financial advisors. Journal of Personal Finance, 18(2), 39-49.

Lim, H., Heckman, S. J., Letkiewicz, J. C., & Montalto, C. P. (2014). Financial stress, self-efficacy, and financial help-seeking. Journal of Financial Counseling and Planning, 25(2), 14, 148-160.

Longo, J. (2014). Trading and investment strategies in behavioral finance. In H. K. Baker & V. Ricciardi (Eds.), Investor behavior: The psychology of financial planning and investing (pp. 495-512). Wiley

Marsden, M., Zick, C. D., & Mayer, R. N. (2011). The value of seeking financial advice. Journal of family and economic issues, 32(4), 625-643.

Martin T., Finke, M. & Gibson, P. (2014). Race, trust, and retirement decisions. Journal of Personal Finance, 13(2), 62.

Maymin, & Fisher, G. S. (2011). Preventing emotional investing: an added value of an investment advisor. The Journal of Wealth Management, 13(4), 34-43.

Moreland, K. A. (2018). Seeking financial advice and other desirable financial behaviors. Journal of Financial Counseling and Planning, 29(2), 198-207.

Park, E., & Yao, R. (2016). Financial Risk Attitude and Behavior: Do Planners Help Increase Consistency? Journal of Family and Economic Issues, 37(4), 624–638.

Pitters, J., & Oberlechner, T. (2014). The psychology of trading and investing. In H. K. Baker & V. Ricciardi (Eds.), Investor behavior: The psychology of financial planning and investing (pp. 459-476). Wiley.

Puri, M. & Robinson, D. T. (2007). Optimism and economic choice. Journal of Financial Economics, 86(1), 71-99.

Reiter, M., Seay, M., & Loving, A. (2021). Diversity in financial planning: Race, gender, and the likelihood to trust a financial planner. Financial Planning Review, e1134.

Robb, C. A., Babiarz, P., Woodyard, A. & Seay, M. (2015). Bounded rationality and use of alternative financial services. Journal of Consumer Affairs, 49(2). 407–435.

Salter, J., Harness, N., & Chatterjee, S. (2010). Utilization of financial advisors by affluent retirees. Financial Services Review, 19(3), 245-263

Schepen, A., & Burger, M. J. (2022). Professional financial advice and subjective well-being. Applied Research in Quality of Life, 1-38.

Schmeling, M. (2009). Investor sentiment and stock returns: Some international evidence. Journal of Empirical Finance, 16(3), 394408.

Seay, M., Kim, K. T. K., & Heckman, S. J. (2016). Exploring the demand for retirement planning advice: The role of financial literacy. Financial Services Review, 25(4), 331–350.

Simon, H. A. (2000). Bounded rationality in social science: today and tomorrow. Mind & Society, 1(1), 25-39.

Tokar Asaad, C. (2015). Financial literacy and financial behavior: Assessing knowledge and confidence. Financial Services Review, 24(2).

Van Rooij, M., Lusardi, A., & Alessie, R. (2011). Financial literacy and stock market participation. Journal of Financial Economics, 101(2), 449-472.

Winchester, D. D., Huston, S. J., & Finke, M. S. (2011). Investor prudence and the role of financial advice. Journal of Financial Service Professionals, 65(4).

White, K., & Heckman, S. (2016). Financial planner use among Black and Hispanic households. Journal of Financial Planning, 29(9), 40-49.

Yalçın, I. (2011). Social support and optimism as predictors of life satisfaction of college students. International Journal for the Advancement of Counselling, 33(2), 79-87.

Yeske, D., & Buie, E. (2014). Policy‐based financial planning: Decision rules for a changing world. In H. K. Baker & V. Ricciardi (Eds.), Investor behavior: The psychology of financial planning and investing (pp. 189-208). Wiley.