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Journal of Finance Vol. 75 No. 2 2020

The Market for Conflicted Advice

Briana Chang; Martin Szydlowski1,2,3,4,5,6,7,8,9,10

1 Conference Board · 2 University of Minnesota · 3 Philips (Finland) · 4 University of Wisconsin–Madison · 5 Gregor Mendel Institute of Molecular Plant Biology · 6 Ricardo (United Kingdom) · 7 MARK Resources (United States) · 8 Vetenskap I Skolan · 9 Orlov State University · 10 Christ University

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.

DOI
10.1111/jofi.12848
Volume
75
Issue
2
Pages
867-903
Language
en
Sources
bibtex:phds-export.bib crossref openalex

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