Fiduciary Duty and the Market for Financial Advice
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.
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