The Market for Conflicted Advice

Abstract

We present a model of the market for advice in which advisers have conflicts of interest and compete for heterogeneous customers through information provision. The competitive equilibrium features information dispersion and partial disclosure. Although conflicted fees lead to distorted information, they are irrelevant for customers' welfare: banning conflicted fees improves only the information quality, not customers' welfare. Instead, financial literacy education for the least informed customers can improve all customers' welfare because of a spillover effect. Furthermore, customers who trade through advisers realize lower average returns, which rationalizes empirical findings.

Regulation of Charlatans in High‐Skill Professions

“…They show that when consumers are naive and do not take into account the conflict of interest between broker compensation and their investment advice, mandating public disclosure of contracts can make consumers better off. However, using a two-sided matching model similar to ours, Chang and Szydlowski (2020) show that when consumers do take this conflict of interest into account, regulating contracts (to mitigate the conflict of interest) reduces information quality but does not change customer welfare. The reason is that regulation reduces fees for all providers, leading to less information provision, leaving consumers indifferent in equilibrium.…”

The Banker's Oath And Financial Advice

“…Based on archival data, Christoffersen and Musto (2015); Bergstresser et al (2009); Hackethal et al (2012); Guerico and Reuter (2014); Hoechle et al (2018); Fecht et al (2018); Egan (2019) provide empirical evidence that brokers and advisers direct consumers to high-fee products. Recent theoretical studies focus on the effects of incentive structures and of related policy instruments on financial mis-behavior (Inderst and Ottaviani, 2009;Stoughton et al, 2011;Inderst and Ottaviani, 2012a,b;Chang and Szydlowski, 2020). We add to this literature by demonstrating that customers themselves can influence the outcome of financial advice with simple nudges, and by suggesting that unconventional instruments like the banker's oath can complement more traditional regulation.…”

“…Many policy interventions are debated and crucially depend on specific product features and on particular market channels (Inderst and Ottaviani, 2012a). Moreover, they do not necessarily increase customers' welfare in equilibrium (Chang and Szydlowski, 2020). The Netherlands therefore introduced, next to other policy interventions, a rather unusual and novel instrument: the so-called "banker's oath".…”