This paper investigates the determinants of the compensation structure for brokers who advise customers regarding the suitability of financial products. Our model explains why brokers are commonly compensated indirectly through contingent commissions paid by product providers, even though this compensation structure may lead to biased advice. We investigate when policy intervention that mandates disclosure or prohibits commissions can protect naive consumers from exploitation or enhance efficiency by leading to more informative advice.
How (not) to pay for advice: A framework for consumer financial protection
OTTAVIANI, MARCO M.
2012
Abstract
This paper investigates the determinants of the compensation structure for brokers who advise customers regarding the suitability of financial products. Our model explains why brokers are commonly compensated indirectly through contingent commissions paid by product providers, even though this compensation structure may lead to biased advice. We investigate when policy intervention that mandates disclosure or prohibits commissions can protect naive consumers from exploitation or enhance efficiency by leading to more informative advice.
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