Fiduciary Duty and the Market for Financial Advice

47 Pages Posted: 22 May 2019 Last revised: 31 Aug 2022

See all articles by Vivek Bhattacharya

Vivek Bhattacharya

Northwestern University

Gaston Illanes

Northwestern University

Manisha Padi

University of California, Berkeley - School of Law

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

Fiduciary duty aims to solve principal-agent problems, and the United States is in the middle of a protracted debate surrounding the merits of extending it to all financial advisers. Leveraging a transaction-level dataset of deferred annuities and state-level variation in common law fiduciary duty, we find that it raises risk-adjusted returns by 25 bp. Through the lens of a model of entry and advice provision, we argue that this effect can be due to both an increase in compliance costs (a fixed cost channel) and a direct constraint on low-quality advice (an advice channel), and we show how to disentangle these two effects. Model estimates indicate that the advice channel is the dominant force in explaining the observed results, and counterfactual simulations suggest that further increases in the stringency of fiduciary duty, such as a federal fiduciary standard, will continue to improve advice.

Suggested Citation

Bhattacharya, Vivek and Illanes, Gaston and Padi, Manisha, Fiduciary Duty and the Market for Financial Advice (May 2019). NBER Working Paper No. w25861, Available at SSRN: https://ssrn.com/abstract=3391014

Vivek Bhattacharya (Contact Author)

Northwestern University ( email )

Gaston Illanes

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Manisha Padi

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

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