Networks, Knowledge, and Nudges: Determinants of Retail Investor Compliance

This paper studies the behavioral and structural determinants of retail investors’ engagement with FINRA Rule 4512, a light-touch intervention encouraging the voluntary designation of a trusted contact. Using microdata from the 2021 National Financial Capability Study, we show that fewer than 38% of eligible U.S. investors had ever adopted this safeguard, pointing to substantial frictions in precautionary financial behavior. We develop a behavioral framework in which adoption reflects bounded attention, financial capability, portfolio complexity, and social trust. Empirically, we analyze both naming a trusted contact and being named by others. To address endogeneity, we instrument financial literacy with exposure to mandatory high-school financial education. Financial literacy has a large causal effect on compliance, portfolio sophistication predicts both outcomes, and social capital strongly moderates these relationships. In low-trust environments, literacy weakly predicts or deters delegation; in high-trust regions, it powerfully amplifies adoption and peer recognition.