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The effect of advisors' incentives on clients' investments

Author

Listed:
  • Battiston, Diego
  • Blanes I Vidal, Jordi
  • Hortala-Vallve, Rafael
  • Lou, Dong

Abstract

We use granular data from an investment firm and a credible identification strategy to estimate the effect of financial advisors' incentives on client investments. Exploiting a natural experiment triggered by the 2018 implementation of Markets in Financial Instruments Directive II (MiFID II), we find that clients' investments respond strongly to changes in advisor incentives. Advisors react through multiple mechanisms: (i) inducing existing clients to bring in new money, (ii) channeling it to high-incentive funds, and (iii) attracting more new clients. We also find that the MiFID II reform generated more balanced incentives, which translated into higher portfolio efficiency through lower average fees and stronger portfolio diversification.

Suggested Citation

  • Battiston, Diego & Blanes I Vidal, Jordi & Hortala-Vallve, Rafael & Lou, Dong, 2026. "The effect of advisors' incentives on clients' investments," LSE Research Online Documents on Economics 129027, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:129027
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    File URL: https://researchonline.lse.ac.uk/id/eprint/129027/
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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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