The Market for Conflicted Advice

Briana Chang, Martin Szydlowski

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)867-903
Number of pages37
JournalJournal of Finance
Volume75
Issue number2
DOIs
StatePublished - Apr 1 2020

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