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The Market for Conflicted Advice

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  • BRIANA CHANG
  • MARTIN SZYDLOWSKI

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.

Suggested Citation

  • Briana Chang & Martin Szydlowski, 2020. "The Market for Conflicted Advice," Journal of Finance, American Finance Association, vol. 75(2), pages 867-903, April.
    • Handle: RePEc:bla:jfinan:v:75:y:2020:i:2:p:867-903
    DOI: 10.1111/jofi.12848
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ian M. Schmutte & Nathan Yoder, 2022. "Information Design for Differential Privacy," Papers 2202.05452, arXiv.org, revised Jul 2024.
    2. Utz Weitzel & Michael Kirchler, 2021. "The Banker's Oath And Financial Advice," Tinbergen Institute Discussion Papers 21-032/IV, Tinbergen Institute.
    3. Cristian Escudero & José L. Ruiz, 2022. "Choosing the highest annuity payout: the role of intermediation and firm reputation," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(4), pages 973-1004, October.
    4. Weitzel, Utz & Kirchler, Michael, 2023. "The Banker’s oath and financial advice," Journal of Banking & Finance, Elsevier, vol. 148(C).
    5. Yang Sun, 2021. "Index Fund Entry and Financial Product Market Competition," Management Science, INFORMS, vol. 67(1), pages 500-523, January.
    6. Azarmsa, Ehsan & Cong, Lin William, 2020. "Persuasion in relationship finance," Journal of Financial Economics, Elsevier, vol. 138(3), pages 818-837.
    7. Jonathan B. Berk & Jules H. Van Binsbergen, 2022. "Regulation of Charlatans in High‐Skill Professions," Journal of Finance, American Finance Association, vol. 77(2), pages 1219-1258, April.
    8. Utz Weitzel & Michael Kirchler, 2022. "The Banker's Oath And Financial Advice," Working Papers 2022-13, Faculty of Economics and Statistics, Universität Innsbruck.
    9. Meyer, Steffen & Uhr, Charline & Loos, Benjamin & Hackethal, Andreas, 2023. "Switching from commissions on mutual funds to flat-fees: How are advisory clients affected?," Journal of Economic Behavior & Organization, Elsevier, vol. 209(C), pages 423-449.

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