Conflict of Interest, Disclosure and Vertical Relationships: An Experimental Analysis

Abstract

Vertical integration in providing financial products and advice is not uncommon. We conduct an experiment in which a financial advisor recommends to a client one of two potential assets to purchase and an asset purchase price. In one setting, the players’ incentives are aligned. In another, a conflict of interest exists with the advisor's remuneration favouring one particular asset. We find that conflict influences the advisor's asset recommendation away from the asset that would better serve the client. Disclosure of that conflict, however, influences neither the advisor's asset recommendation nor, more surprisingly, the client's likelihood of rejecting that recommendation.