Regulating Commission-Based Financial Advice: Evidence from a Natural Experiment

65 Pages Posted: 14 Jun 2019 Last revised: 15 Dec 2020

See all articles by Stanislav Sokolinski

Stanislav Sokolinski

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: December 15, 2020

Abstract

Controversies around commission-based financial advice led many policy makers worldwide
to introduce commission caps. Are these regulations effective in reducing prices of
financial products and stimulating investment? I examine these questions in the context
of mutual fund market by estimating the causal effects of regulating commissions for fund
distribution. I exploit the unique institutional setting in Israel and the 2013 policy change
when the government reduced commissions differently for different fund types. The reform
led to a major decline in fund expense ratios and a consequent increase in fund flows.
Funds with price-sensitive investors experienced a 35% larger inflows, in line with investor
response to price declines. Mutual fund families introduced new funds in asset categories
with reduced commissions. These results suggest that a reduction in distribution costs by a
regulator fosters price competition, leading to significant savings for investors, reallocation
of capital toward financial products and changes in market structure.

Keywords: Financial Advice, Financial Regulation, Mutual Funds

JEL Classification: G23, G24, G28, G53

Suggested Citation

Sokolinski, Stanislav, Regulating Commission-Based Financial Advice: Evidence from a Natural Experiment (December 15, 2020). Available at SSRN: https://ssrn.com/abstract=3399000 or http://dx.doi.org/10.2139/ssrn.3399000

Stanislav Sokolinski (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

111 Washington Avenue
Newark, NJ 07102
United States

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