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Fiduciary Duty and the Market for Financial Advice

Vivek Bhattacharya, Gaston Illanes, Manisha Padi

NBER Working Paper No. 25861
Issued in May 2019, Revised in January 2020
NBER Program(s):Industrial Organization Program, Law and Economics Program

Fiduciary duty may combat principal-agent problems in the provision of financial advice, but it may also impose costs through legal liability. We study the effects of fiduciary duty on the deferred annuity market using transaction-level data. Leveraging state-level variation in common law fiduciary duty, we find that it raises risk-adjusted returns by 25 bp without decreasing transacted volume. We develop a model of entry and advice provision, which shows that fiduciary duty operates by directly constraining low-quality advice rather than by solely increasing compliance costs. Overall, results suggest that expanding fiduciary duty would improve investor welfare.

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Document Object Identifier (DOI): 10.3386/w25861

 
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