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Non-Exclusive Financial Advice

We study a model of financial advice where investors rely on a financial expert (the advisor) to make their asset allocation choices. There is only one source of risk and the advisor is privately informed about the volatility of the return of the risky asset. Moreover, the advisor’s preferences are misaligned with those of his uninformed clients, and this conflict of interests cannot be solved by means of state-contingent monetary transfers. In equilibrium, investors delegate the investment decision to the financial advisor. However, they impose restrictions on the advisor’s choices. These restrictions take the form of a cap or a floor on the amount invested in the risky asset. The precise form of partial delegation that emerges depends on whether financial advice is exclusive or not, and in the case of non-exclusive advice, on whether the common advisor perceives investors’ asset allocations as complements or as substitutes. We also analyze the implications of non-exclusivity in financial advice on investment behavior and investors’ expected utility.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 347.

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Date of creation: 10 Dec 2013
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Handle: RePEc:sef:csefwp:347
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  1. Ricardo Alonso & Niko Matouschek, 2008. "Optimal Delegation," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 259-293.
  2. Andrea Attar & Thomas Mariotti & François Salanié, 2010. "Non-Exclusive Competition in the Market for Lemons," CEIS Research Paper 159, Tor Vergata University, CEIS, revised 28 May 2010.
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  4. Georgarakos, Dimitris & Inderst, Roman, 2014. "Financial Advice and Stock Market Participation," CEPR Discussion Papers 9922, C.E.P.R. Discussion Papers.
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  7. Palomino, Frederic & Prat, Andrea, 2003. " Risk Taking and Optimal Contracts for Money Managers," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 113-37, Spring.
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  12. Roman Inderst & Marco Ottaviani, 2012. "Financial Advice," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 494-512, June.
  13. Hackethal, Andreas & Haliassos, Michael & Jappelli, Tullio, 2012. "Financial advisors: A case of babysitters?," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 509-524.
  14. Martimort David & Stole Lars, 2003. "Contractual Externalities and Common Agency Equilibria," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-40, July.
  15. Martimort, David & Semenov, Aggey, 2006. "Continuity in mechanism design without transfers," Economics Letters, Elsevier, vol. 93(2), pages 182-189, November.
  16. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
  17. Stoughton, Neal M, 1993. " Moral Hazard and the Portfolio Management Problem," Journal of Finance, American Finance Association, vol. 48(5), pages 2009-28, December.
  18. Nahum D. Melumad & Toshiyuki Shibano, 1991. "Communication in Settings with No. Transfers," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 173-198, Summer.
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