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Commission Bans and the Source and Quality of Financial Advice

Working Papers

Published: 13 September 2012

By: Janko Gorter

In the wake of the financial crisis, several countries are to ban commission payments to improve the quality of financial advice. This paper investigates the potential impact of commission bans on the source and quality of financial advice. To this end, we extend Inderst and Ottaviani’s (2012) framework by allowing for both direct and intermediary advice. Our extended model has a unique separating equilibrium where customers that are naïve about conflicts of interests prefer direct advice to intermediary advice, though the latter is of better quality. Alert customers rationally prefer intermediary advice. Accordingly, the welfare benefits from commissions bans may be limited in practice.
 
Key words: information provision, conflicts of interests, commission bans, distribution channel, consumer financial protection.
JEL classification: D18, D83, G24, G28.

Working paper no. 350

350 - Commission Bans and the Source and Quality of Financial Advice

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