Browsing by Subject "Finanzberatung"

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    Essays on remuneration systems of financial advisors
    (2019) Weinert, Markus; Schiller, Jörg
    Various policy interventions aim at preventing consumers from inadequate financial advice. One important issue that is often subject to intense discussions is the regulation of financial advisors compensation. In most countries, financial advisors are remunerated by product providers via commissions. Concerns are, that this practice leads to biased advice, since an advisor then has an incentive to recommend the product with the highest commission instead of the most suitable product. In order to circumvent the aforementioned incentive problems, consumer protection agencies and regulators propose that financial advisors should exclusively be compensated by consumers via a fee-for-advice. Even though, enacting a ban on commissions constitutes a severe intervention for financial advice markets, the effects of such a regulatory measure are only inadequate studied. The aim of this dissertation is to derive a deeper understanding of how a ban on commissions affects these markets. The three essays in the present thesis analyze the effects of a ban on commissions on bias in advice, total welfare and competition between product providers. The first essay considers the effect of a ban on commissions on the bias of advice in a theoretical model. If consumers ask for reasons and explanations in the advice process, why a particular product should suit their needs, an advisor faces transaction costs for recommending a product. These “persuasion costs” are intuitively low for a product, which is initially preferred by consumers (standard product), and high for a product, which is in consumers eyes unlikely to satisfy their needs (specialized product). The theoretical model shows that advice might not be solely distorted by commissions, but also by these persuasion costs. Therefore, advice can also be biased when consumers exclusively compensate the advisor. The extent of biased advice depends crucially on market shares of product providers and on potential reputational costs for the advisor enforced by market discipline. The second essay theoretically analyzes welfare effects of fee-based and commission-based remuneration systems for financial advisors. In markets, where advice is essential for consumers, product providers usually cannot sell their products directly to consumers. In these markets, commissions do not only serve as a compensation for the advisor, but also as a channel for competition between product providers. Consequently, a regulatory ban on commissions should be considered as a two-sided coin. On the one hand, a ban on commissions may reduce distortion in advice, but on the other hand, it may restrict competition between product providers. The analysis shows, that product providers have different incentives to compete through commissions depending on their market shares, consumers product valuation and potential reputational costs for the advisor. If the difference of commissions for different products is sufficiently small in equilibrium, a commission-based remuneration system leads to a strictly higher total welfare in comparison to a fee-based remuneration system due to a higher fraction of consumers, who are matched with their best suitable product. Otherwise, total welfare is higher under a fee-based remuneration system. The third essay theoretically analyzes whether and how product providers are able to compete in markets where products cannot be sold directly to consumers and commissions are banned by regulation. In particular, two possible channels are considered: Competition through product prices and competition through informative advertising. If a product provider engages in informative advertising, consumers may already be familiar with certain product characteristics before consulting an advisor. By this, advisors persuasion costs for the advertised product may be lower in an advice process, which results in a higher incentive to recommend the advertised product in comparison to other products. In addition, product providers are able to steer advice towards an advertised product. It is shown, that competition through product prices does not take place in equilibrium. However, informative advertising may serve as a channel for competition between product providers if the effect of steering advice is sufficiently high. Analogous to commissions, product providers incentives to engage in informative advertising depend on market shares, consumers product valuations and potential reputational costs for the advisor. In summary, this thesis provides detailed insides of an advice process and the affiliated interaction of driving factors, which influence the quality of advice. The underlying analysis shows that a fee-based remuneration system for financial advisors does not constitute a universal remedy for biased advice and total welfare losses in the corresponding markets.