Conflict of Interest between Investors and Financial Advisers

This article discusses the conflict of interest between investors and their financial advisers resulting from fee structures and commission schemes. Previous studies have treated this issue in relation to the amount invested or the expected holding period of the mutual fund. In this paper, we develop a model that includes simultaneously both of these parameters. The model uses a numerical simulation to support the finding that the overwhelming majority of investors are exposed to this conflict of interest and especially those investing in large amounts. A narrow area is isolated where the interests of financial advisers converge with those of investors. When we vary the variables of the model, we find that the conflict of interest is unstable and can be improved only marginally. Nonetheless we suggest two solutions, which differ in the uncertain withdrawal of the investor that is borne either by the mutual fund promoter or by the financial adviser.
JEL Codes: G23; G24; G29.
Keywords: Mutual Funds; Brokerage; Conflict of Interest.