Conflict of Interest, Disclosure, and Vertical Relationships: An Experimental Analysis

Vertical integration between providers of financial advice and producers of financial products is not uncommon. We consider the impact of disclosure where full disclosure of the incentives of an advisor to recommend the product of an upstream affiliate rather than from some other producer is not possible. We report the results of an experiment in which an informed advisor recommends to a less informed client one of two potential assets to purchase and also a price to offer. In one setting the incentives of the two players are fully aligned but in another the advisor receives an additional payment for selling one of the assets. We consider two treatments – with and without disclosure to the client of the advisor’s interests. With disclosure, the client is only informed of the presence but not the size of an additional payment the advisor receives for selling one of the assets. We find that an advisor’s conflict of interest influences their asset recommendation away from the asset that best serves the client’s interests. The partial disclosure of the advisor’s conflict of interest as common knowledge seems to influence neither the advisor’s recommended asset nor, more surprisingly, the client’s likelihood of rejecting the advisor’s recommendation. However, we do find that disclosure results in a larger financial payoff for the client in our experimental setup.