Banking on common ground

By Mark Burgess | October 25, 2019 | Last updated on November 29, 2023
3 min read
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What makes a client follow advice? There are likely several factors. For many advisors, discerning a client’s needs and providing appropriate advice may be the easy part; making sure they follow it is more complicated — and sometimes frustrating.

New research suggests the quality of advice, and even the skills with which you communicate it, may be less important than something more basic: how much you have in common with the client.

You’ve probably considered the similarities you share with clients and felt instinctively that common ground contributes to building trust. According to a paper published earlier this year by German academics Oscar Stolper, from the University of Marburg, and Andreas Walter, from the University of Giessen, the more demographic commonalities that exist between advisors and clients, the more likely a client is to follow advice.

The researchers compared interactions between clients and advisors while measuring their similarities when it came to age, gender, marital status and parental status. They found the likelihood of clients following advice was significantly higher when clients and advisors shared more of those four demographic characteristics.

“[O]ur results point to an impact of homophily — a powerful principle that governs who individuals regard to be their relevant others and those whose opinions they attend to — on clients’ decision as to whether or not to follow advisors’ recommendations,” the paper says.

The researchers found differences between how men and women value these similarities. Men were likely to follow advice from male advisors of a similar age. For women, an advisor’s marital and parental status were more important.

Those working in the financial sector followed advice regardless of similarities shared with the advisor. “This result suggests that the homophily effect in financial advice is limited to settings in which there is a considerable knowledge gap between client and advisor when it comes to assessing the content of the advice,” the paper says.

That knowledge asymmetry exists in most advisor-client relationships. Not many clients are capable of, nor interested in, evaluating recommendations independently. Investment decisions are largely explained “by simple heuristics” based on interactions with advisors, the paper says. “[D]emographic characteristics appear to be particularly strong signals.”

The homophily effect diminishes with time. The authors say that, for long-term clients, familiarity and experience at least partly offset the importance of demographic similarities.

The paper puts the finding in the context of recent industry developments, such as regulations to ban conflicted advice and the growing popularity of robo-advisors. The value proposition of advisors has shifted from choosing products to communicating the benefits of their recommendations, the authors write.

“Against this background, targeted client-advisor matching based on homophily can harness the effect that demographically closer individuals benefit from easier mutual understanding,” the paper says.

“By the same token, individuals might perceive robo-advice as impersonal or inadequately customized to their preferences, because they do not share any common characteristics with the computer algorithm.”

This could mean clients are less likely to follow advice from robos — a potential selling point for advisors. It could also lead to more humanized forms of digital wealth management, the authors say, pointing to Deutsche Bank’s “Robin” robo-advisor, which follows the approach of humanized digital assistants like Apple’s Siri and Amazon’s Alexa.

There’s a potential dark side. Clients who trust their advisors based on demographic similarities rather than on the advice they’re receiving or their portfolios’ performance could “aggravate” advisor misconduct, the paper says. The benefits of homophily, therefore, depend on whether advisors act in their clients’ best interests.

Related biases

Investors exhibit familiarity bias when they invest in companies with which they are familiar: employees may favour shares in their own companies and clients may prefer stocks of well-known brands. A common outcome is home country bias, where portfolios are disproportionately weighted to listings in an investor’s country at the expense of global diversification.

“Birds of a Feather: The Impact of Homophily on the Propensity to Follow Financial Advice” was published in the February 2019 issue of The Review of Financial Studies

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Mark Burgess

Mark was the managing editor of from 2017 to 2024.