We present a model of the market for advice, where advisers have conflicts of interest and compete for heterogeneous customers through information provision. The competitive equilibrium features information dispersion: advisers with expertise in more information-sensitive assets attract less informed customers, provide worse information, and earn higher rents. Even though distorted information leads to lower returns, investors choose to trade through advisers, which rationalizes empirical findings. Banning conflicted payments only improves the information quality but not customers’ welfare. It is the underlying distribution of financial literacy that determines welfare, and the fee structure is irrelevant.
Fédération des Banques Françaises Research Initiative