The Market for Conflicted Advice |
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| Authors: | BRIANA CHANG MARTIN SZYDLOWSKI |
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| Affiliation: | 1. Briana Chang is with the University of Wisconsin-Madison. Martin Szydlowski is with the University of Minnesota. We thank the Editor, Philip Bond, as well as an anonymous associate editor and two anonymous referees for helpful comments. We would also like to thank Dean Corbae;2. Mark Egan;3. Simon Gervais;4. Erica Johnson;5. Pablo Kurlat;6. Ricardo Lagos;7. Gregor Matvos;8. John Nash;9. Dimitry Orlov;10. Christine Parlour;11. Erwan Quintin;12. Adriano Rampini;13. Mark Ready;14. Sönje Reiche;15. Günther Strobl;16. Vish Viswanathan;17. and Randy Wright for their useful discussions;18. as well as participants at the 8th Annual Conference on Money, Banking and Asset Markets, the Asian Meeting of the Econometric Society, the Financial Intermediation Research Society Conference, the Finance Theory Group Meeting, the Frankfurt School of Finance and Management, the Midwest Economic Theory Conference, the 9th NYU Search Theory Workshop, the Society for the Advancement of Economic Theory Conference, the Society for Economic Dynamics Annual Meeting, the Society for Financial Studies Cavalcade, the Toulouse School of Economics, the UNC/Duke Corporate Finance Conference, the University of Minnesota, the University of Wisconsin, the West Coast Search and Matching Workshop, and the WU Gutmann Center Symposium for helpful comments. The authors do not have any conflicts of interest, as identified in The Journal of Finance's disclosure policy. |
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| 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. |
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