The Market for Conflicted Advice

Chang, Briana; Szydlowski, Martin

doi:10.2139/ssrn.2843050

Cited by 5 publications

(6 citation statements)

References 17 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…They show that when consumers are naive and do not take into account the conflict of interest between broker compensation and their investment advice, mandating public disclosure of contracts can make consumers better off. However, using a two‐sided matching model similar to ours, Chang and Szydlowski (2020) show that when consumers do take this conflict of interest into account, regulating contracts (to mitigate the conflict of interest) reduces information quality but does not change customer welfare. The reason is that regulation reduces fees for all providers, leading to less information provision, leaving consumers indifferent in equilibrium.…”

Section: Introductionmentioning

confidence: 92%

Regulation of Charlatans in High‐Skill Professions

Berk¹,

BINSBERGEN²

2022

The Journal of Finance

View full text Add to dashboard Cite

We model a market for a skill in short supply and high demand, where the presence of charlatans (professionals who sell a service they do not deliver on) is an equilibrium outcome. In the model, reducing the number of charlatans through regulation lowers consumer surplus because of the resulting reduction in competition among producers. Producers can benefit from this reduction, potentially explaining the regulation we observe. The effect on total surplus depends on the type of regulation. We derive the factors that drive the cross-sectional variation in charlatans (regulation) across professions."We write today to ask what specific steps FINRA will take to address the pervasive misconduct among its financial advisers and to protect families looking to invest their hard-earned savings." U.S. Senators E. Warren and T. Cotton, Letter to FINRA May 11, 2016 AN IMPORTANT ROLE FOR GOVERNMENT in the modern economy concerns the regulation of standards and information disclosure for goods and services. As the introductory quote from Senators Warren and Cotton illustrates, the justification that legislators use for this role is generally the protection of consumers. Indeed, the assumption that regulation is in consumers' interest is often taken for granted. In this paper, we argue that this assumption requires more rigorous justification. We demonstrate in our model that in highly regulated sectors of the economy for goods and services that are in short supply and

show abstract

Section: Introductionmentioning

confidence: 92%

Regulation of Charlatans in High‐Skill Professions

Berk¹,

BINSBERGEN²

2022

The Journal of Finance

View full text Add to dashboard Cite

show abstract

“…But if consumers believe that advisors provide unbiased advice, commission-based incentive schemes can be used to exploit their naïvete. In the model of Chang and Szydlowski (2016), consumers are rational, so competition partially disciplines advisors' conflicts of interest. Placing limits on the extent to which advisors can earn conflicted compensation leads advisors to charge higher upfront fees and may not improve consumer welfare.…”

Section: Advice and Disclosurementioning

confidence: 99%

Behavioral Household Finance

Beshears

Choi

Laibson

et al. 2018

View full text Add to dashboard Cite

This chapter provides an overview of household finance. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: consumption and savings, borrowing, payments, asset allocation, and insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: education and information, peer effects and social influence, product design, advice and disclosure, choice architecture, and interventions that directly target prices or quantities. This chapter is divided into two parts, each of which is further divided into several sections. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing both extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: (I) consumption and savings, (II) borrowing, (III) payments, (IV) asset allocation, and (V) insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: (VI) education and information, (VII) peer effects and social influence, (VIII) product design, (IX) advice and disclosure, (X) choice architecture, and (XI) interventions that directly target prices or quantities. The final section of the paper (XII) concludes. John BeshearsWe offer broad coverage of the household finance literature, but we limit the scope of our discussion along some dimensions. We focus on the U.S. institutional context and on empirical work based on U.S. data, although we do bring evidence from other wealthy countries to bear when germane and occasionally reference evidence from developing countries. We address household asset allocation but do not draw out its implications for asset pricing, which are covered by the asset pricing chapter in this handbook. Although household decisions regarding health care are relevant to household finance, we largely omit this literature from our chapter because it is covered in depth in the chapter on behavioral health economics. Finally, there is some overlap between our section on financial product design and the chapter on behavioral industrial organization; we refer readers to that chapter for related material on that topic. Part 1: Facts I. Consumption and SavingsBeginning with the seminal work of Modigliani and Brumberg (1954) and Friedman (1957), economists have embraced the view that households choose to save and borrow to smooth consumption over the lifecycle. Intuitively, if agents have concave utility functions over consumption, then they should spread consumption across time to optimally...

show abstract

“…Financial advisors can influence retirees' decisions to annuitise, since they can explain the consequences of retaining financial risk with phased withdrawals (Agnew et al 2008), advise people of the tax benefits associated with their choices (Cici et al 2017) and reduce search costs (Bergstresser et al 2008). On the other hand, brokers can also maximise their own commissions rather than focusing on the customer's welfare based on the conflicting advice available (Anagol et al 2017;Bolton et al 2007;Chang and Szydlowski 2020). Specifically, annuity brokers and sales agents play a key role in the Chilean annuity market (Morales and Larraín 2017;Ruiz 2014).…”

Section: Literature Reviewmentioning

confidence: 99%

“…2 Marginal effects (predictive margins with 99% Cis)-Model 1. Source Authors' own elaboration evidence of conflicting advice (Anagol et al 2017;Bolton et al 2007;Chang and Szydlowski 2020).…”

Section: Choosing the Highest Annuity Payoutmentioning

confidence: 99%

“…Independent annuity brokers must be registered by regulatory bodies, the Superintendence of Pensions (SP) and the Commission for the Financial Market (CMF, Spanish acronym). There are also sales agents from LICs who provide advice on the process, although they have evident moral hazard issues when promoting their LIC (Anagol et al 2017;Bolton et al 2007;Chang and Szydlowski 2020). Annuity brokers and sales agents may charge an intermediation commission of no more than 2% of the balance devoted to financing the pension modality, with a ceiling of UF 60 1 (equivalent to USD 2311).…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Choosing the highest annuity payout: the role of intermediation and firm reputation

Escudero

Ruiz

2021

Geneva Pap Risk Insur Issues Pract

View full text Add to dashboard Cite

In this paper, we analyse retirees' decision-making from the different bids made available by life insurance companies in the Chilean annuity market. We find that choosing the highest annuity payout was positively (negatively) correlated with the advice given by independent brokers (sales agents and average years of education in the municipality) for a January 2008-May 2018 sample. We also found that retirees were willing to pay for firm reputation. In addition, people who are more likely to take a pension payout without consulting intermediaries are older, married, have a higher pension balance and purchase an immediate annuity. These findings are of interest to those seeking to improve the efficiency and effectiveness of the annuity system.

show abstract

The Market for Conflicted Advice

Cited by 5 publications

References 17 publications

Regulation of Charlatans in High‐Skill Professions

Regulation of Charlatans in High‐Skill Professions

Behavioral Household Finance

Choosing the highest annuity payout: the role of intermediation and firm reputation

Contact Info

Product

Resources

About