Consumer Persuasion and Remuneration of Advisors in Financial Markets

Abstract

Many consumers rely on professional advisors when purchasing financial products. We compare fee-based and commission-based remuneration systems for financial advisors from a total welfare perspective in a theoretical model, where advisors face transaction costs from persuading consumers of a recommended product and consumers have an initial prior belief about their best suitable product. We show, that total welfare is higher under a commission-based remuneration system in comparison to a fee-based remuneration system, if the magnitude of commission payments for different products are sufficiently close to each other.