Conflicts & Capital Allocation

46 Pages Posted: 29 Jun 2016 Last revised: 13 Jun 2017

Benjamin P. Edwards

University of Nevada, William S. Boyd School of Law

Date Written: October 10, 2016

Abstract

The regulatory structure for financial advice now tolerates incentives motivating financial advisors to manipulate and deceive retail investors. While scholars thus far have argued for ways to improve investor protections, the literature has largely ignored how these flawed incentives affect the economy.

This Article contends that these flawed incentives cause financial advisors to negatively affect capital allocation throughout the overall economy.

This Article draws on literature about manipulation and deception in principal-agent relationships to show how conflicts of interest cause the market for financial advisor services to generate excessive intermediation, driving harms to the real economy. This Article uses case studies of non-traded real estate investment trusts and closed-end funds to illustrate how financial advisor conflicts of interest contribute to inefficient capital allocation and inefficiency in the market for institutional intermediation.

To address this issue, this Article argues that an effective policy response will address compensation incentives and focus on limiting the ability of conflicts of interest to skew capital allocation.

Keywords: securities, fiduciary, investment advice, financial advisers, commissions, compensation, REITS, Closed-End Funds, Intermediation

Suggested Citation

Edwards, Benjamin P., Conflicts & Capital Allocation (October 10, 2016). 78 Ohio St. L.J. 181 (2017). Available at SSRN: https://ssrn.com/abstract=2801672

Benjamin Edwards (Contact Author)

University of Nevada, William S. Boyd School of Law ( email )

4505 South Maryland Parkway
Box 451003
Las Vegas, NV 89154
United States

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