How (not) to pay for advice: A framework for consumer financial protection
AbstractThis paper investigates the determinants of the compensation structure for brokers who advise customers regarding the suitability of financial products. Our model explains why brokers are commonly compensated indirectly through contingent commissions paid by product providers, even though this compensation structure could lead to biased advice. When customers are wary of the adviser's incentives, contingent commissions can be an effective incentive tool to induce the adviser to learn which specialized product is most suitable for the specific needs of customers. If, instead, customers naively believe they receive unbiased advice, high product prices and correspondingly high commissions become a tool of exploitation. Policy intervention that mandates disclosure of commissions can protect naive consumers and increase welfare. However, prohibiting or capping commissions could have the unintended consequence of stifling the adviser's incentive to acquire information. More vigorous competition benefits consumers and reduces exploitation, but firms have limited incentives to educate naive customers.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Economics.
Volume (Year): 105 (2012)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505576
Brokers; Financial advisers; Commissions; Consumer financial protection; Disclosure;
Find related papers by JEL classification:
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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