Out-of-Pocket vs. Out-of-Investment in Financial Advisory Fees: Evidence from the Lab

Generally speaking, this research project attempts to study how different methods of payments affect consumers’ willingness to pay for a product. While the question is relevant to all sorts of products we confine our attention here to products involving uncertainty - specifically to the willingness to pay for financial advice. The assignment of payment through a checking account vs. through an investment portfolio causes a decrease of 25 percent in subjects’ valuation of financial advisory services. Most of this gap in the willingness to pay can be attributed to the deferral of payment until after the outcome of the investment is revealed. Our results highlight the difference between post-service and pre-service payments in a broader context, and provide an explanation for why allowing late payment, after the service has been performed and its outcome revealed, may increase the ex-ante willingness to pay for the service.

A description of relevant data needed to replicate our analysis is reported in the attached file.