Working Paper: NBER ID: w25861
Authors: Vivek Bhattacharya; Gastón Illanes; Manisha Padi
Abstract: Fiduciary duty aims to solve principal-agent problems, and the United States is in the middle of a protracted debate surrounding the merits of extending it to all financial advisers. Leveraging a transaction-level dataset of deferred annuities and state-level variation in common law fiduciary duty, we find that it raises risk-adjusted returns by 25 bp and leads to a 16% decline in the entry of affected firms. Through the lens of a model of entry and advice provision, we argue that this effect can be due to both an increase in fixed costs and an increase in the cost of providing low-quality advice. We show how to disentangle these two effects. Model estimates indicate that both channels are important, and counterfactual simulations suggest that further increases in the stringency of fiduciary duty, such as a federal fiduciary standard, can further improve advice at the cost of reducing the number of firms.
Keywords: fiduciary duty; financial advice; market structure; consumer protection
JEL Codes: G23; G28; K15; L51; L84
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fiduciary duty (G32) | risk-adjusted returns (G12) |
| fiduciary duty (G32) | quality of financial products sold (G20) |
| fiduciary duty (G32) | shift in types of products sold (L81) |
| shift in types of products sold (L81) | better-rated investment options (G11) |
| fiduciary duty (G32) | reduction in number of BD firms (G24) |
| fiduciary duty (G32) | advice channel impact (F65) |
| fiduciary duty (G32) | fixed cost channel impact (D49) |
| advice channel impact (F65) | exit rates of firms (L26) |
| fixed cost channel impact (D49) | exit rates of firms (L26) |
| fiduciary duty (G32) | entry and exit dynamics of firms (D25) |