The effect of advisors' incentives on clients' investments

Diego Battiston, Jordi Blanes I Vidal, Rafael Hortala-Vallve and Dong Lou

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We use granular data from an investment firm and a credible identification strategy to estimate the effect of financial advisors' incentives on client investments. Exploiting a natural experiment triggered by the 2018 implementation of Markets in Financial Instruments Directive II (MiFID II), we find that clients' investments respond strongly to changes in advisor incentives. Advisors react through multiple mechanisms: (i) inducing existing clients to bring in new money, (ii) channeling it to high-incentive funds, and (iii) attracting more new clients. We also find that the MiFID II reform generated more balanced incentives, which translated into higher portfolio efficiency through lower average fees and stronger portfolio diversification.

Keywords: incentives; financial advice; conflicts of interest; asset allocation; performance pay; commissions; MiFID II (search for similar items in EconPapers)
JEL-codes: D81 D91 I23 J24 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2026-04-27
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Published in Journal of Finance, 27, April, 2026. ISSN: 0022-1082

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