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Adviser Compensation, Endogenous Entry, and the Advice Gap

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  • Jurre H. Thiel

Abstract

To prevent biased advice, regulators increasingly ban commission payments to financial advisers. Such bans are associated with "advice gaps," meaning that advice becomes less accessible. To understand the trade-off between the quality and accessibility of advice, this paper develops a model of price competition in advice markets with endogenous entry of advisers. While commission bans increase consumer surplus in the short run, they hurt the profitability of advisers. In the long run, advisers exit the market, advice becomes inaccessible, and consumer surplus decreases. These results imply that accounting for the endogeneity of market structure is important when regulating advice.

Suggested Citation

  • Jurre H. Thiel, 2022. "Adviser Compensation, Endogenous Entry, and the Advice Gap," American Economic Journal: Microeconomics, American Economic Association, vol. 14(3), pages 76-130, August.
    • Handle: RePEc:aea:aejmic:v:14:y:2022:i:3:p:76-130
    DOI: 10.1257/mic.20200074
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services
    • L88 - Industrial Organization - - Industry Studies: Services - - - Government Policy
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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