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

Abstract

Do limitations on commissions paid to financial advisers reduce prices of financial products
and stimulate investment? I examine these questions by estimating the causal effects
of regulating commissions for mutual 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. I interpret these results as investor response to price competition fostered
by a reduction in distribution costs.

Keywords: Financial Advice, Financial Regulation, Mutual Funds

JEL Classification: G23, G24, G28, G53