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Financial Advisor Compensation Structure and Client Equity Allocations

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  • David Blanchett
  • Michael Guillemette
  • Qi Sun

Abstract

Investment advice is a difficult-to-value service and aligning incentives between financial advisors and investors is imperative. A compensation structure that pays advisors primarily through up-front commissions creates a potential short-term relationship, while a trailing commission arrangement better aligns with an intertemporal relationship. This paper explores this effect using a dataset of approximately 120,000 variable annuities from a single insurance company sold from January 1999 to December 2020. We find that clients of financial advisors who are paid higher up-front commissions have greater recent return bias compared to clients of advisors who receive higher trailing commissions. These findings indicate that a nuanced approach to compensation may be needed to balance investor protection with the proper incentives for financial advisors to provide unbiased and high-quality advice.

Suggested Citation

  • David Blanchett & Michael Guillemette & Qi Sun, 2025. "Financial Advisor Compensation Structure and Client Equity Allocations," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 26(2), pages 251-259, April.
    • Handle: RePEc:taf:hbhfxx:v:26:y:2025:i:2:p:251-259
    DOI: 10.1080/15427560.2023.2294812
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