The Market for Conflicted Advice

We study decentralized markets in which advisers have conflicts of interest and compete for customers via information provision. We show that competition partially disciplines conflicted advisers. The equilibrium features information dispersion and sorting of heterogeneous customers and advisers: advisers with expertise in more information sensitive assets attract less informed customers, provide worse information, and earn higher profits. We apply our framework to the market for financial advice and establish new insights: while the conflicted fee structure affects asset return, it is irrelevant for the welfare of consumers. It is the underlying distribution of financial literacy that determines the consumers’ welfare.