Demand-side and Supply-side Constraints in the Market for Financial Advice

In this review, we argue that access to financial advice and the quality of this advice is shaped by a broad array of demand-side and supply-side constraints. While the literature has predominantly focused on conflicts of interest between advisors and clients, we highlight that the transaction costs of providing advice, mistaken beliefs on the demand side or supply side, and other factors can have equally detrimental effects on the quality and access to advice. Moreover, these factors affect how researchers should assess the impact of financial advice across heterogeneous groups of households. While households with low levels of financial literacy are more likely to benefit from advice—potentially including conflicted advice—they are also the least likely to detect misconduct, and perhaps the least likely to understand the value of paying for advice. Regulators should consider not only how regulation changes the quality of advice, but also the fraction of households who are able to receive it and how different groups would have invested without any advice. Financial innovation has the potential to provide customized advice at low cost, but also to embed conflicts of interest in algorithms that are opaque to households and regulators.