Working paper 01/042 - Abstract

Is Commission-Based Financial Advice Always Bad Advice?

Andreas Bentz

Dartmouth College

For many financial products, quality is not obvious to the buyer on purchase (experience goods). Financial advisers who provide advice about the quality of financial products are often rewarded on a commission basis. This may create incentives for the mis-selling of financial products. This paper shows that, under certain plausible modelling assumptions on the behaviour of financial (savings) products, commission payments to the retailer act as signals of quality to the purchaser: high commissions are attached to high-quality products. There is reason to believe that commission-based financial advice is not always bad advice.

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