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Journal of Finance Vol. 81 No. 3 2026

The Effect of Advisors' Incentives on Clients' Investments

Diego Battiston; Jordi Blanes i Vidal1; Rafael Hortalà-Vallvé; Dong Lou2

1 London School of Economics and Political Science · 2 Hong Kong University of Science and Technology

open access

Abstract

We use granular data from an investment firm and a credible identification strategy to estimate the effect of financial advisors' incentives on client investments. Exploiting a natural experiment triggered by the 2018 implementation of Markets in Financial Instruments Directive II (MiFID II), we find that clients' investments respond strongly to changes in advisor incentives. Advisors react through multiple mechanisms: (i) inducing existing clients to bring in new money, (ii) channeling it to high‐incentive funds, and (iii) attracting more new clients. We also find that the MiFID II reform generated more balanced incentives, which translated into higher portfolio efficiency through lower average fees and stronger portfolio diversification.

DOI
10.1111/jofi.70041
Volume
81
Issue
3
Pages
1701-1739
Language
en
Sources
openalex crossref

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