Fiduciary Duty and the Market for Financial Advice

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.