Out-of-pocket vs. out-of-investment in financial advisory fees : Evidence from the lab

Mugerman, Y. and Sade, O. and Winter, E. (2020) Out-of-pocket vs. out-of-investment in financial advisory fees : Evidence from the lab. Journal of Economic Psychology, 81: 102317. ISSN 0167-4870

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The implications of the method of payment to financial advisors on the behavior of individuals are of interest to economists and regulators around the globe. This paper uses an experimental approach to compare two common alternative forms of payment. The first is “out-of-pocket” (an upfront payment from a checking account), and the second is “out-of-investment” (a deferred payment from an investment portfolio account). We document that for the same financial advice, the subjects in the first treatment were willing to pay on average 25 per cent less than the subjects in the second treatment – payment following an investment outcome knowledge, where the payment was framed in terms of gains. We introduce an additional out-of-pocket payment structure where the actual payment is deferred until after the subject discovers the outcome of the investment. Thus, the design can be broken down into two distinct possible effects, an out-of-pocket vs. out-of-investment framing effect and a pre-outcome vs. post-outcome timing effect. We find that the timing effect is the key element: across out-of-pocket payment structures, the subjects were willing to pay significantly less in the pre-outcome treatment than their counterparts were in the post-outcome treatment. 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. © 2020 Elsevier B.V.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Economic Psychology
Additional Information:
This is the author’s version of a work that was accepted for publication in Journal of Economic Psychology. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Psychology, 81, 2020 DOI: 10.1016/j.joep.2020.102317
Uncontrolled Keywords:
?? advisor remunerationlab experimentpayment structurepost-service and pre-service paymentswillingness to payeconomics and econometricsapplied psychologysociology and political science ??
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Deposited On:
18 Feb 2022 15:00
Last Modified:
12 Dec 2023 01:49