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Regulating Commission-Based Financial Advice: Evidence from a Natural Experiment

Published online by Cambridge University Press:  12 August 2022

Stanislav Sokolinski Open the ORCID record for Stanislav Sokolinski [Opens in a new window]
Stanislav Sokolinski*
Affiliation:
Rutgers Business School – Newark and New Brunswick, Department of Finance & Economics [email protected]
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Abstract

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Do limitations on commissions paid to financial advisers reduce prices of financial products and stimulate investment? I examine these questions by estimating the causal effects of regulating commissions for mutual fund distribution. I exploit the unique institutional setting in Israel and the 2013 policy change when the government reduced commissions differently for different fund types. The reform led to a major decline in fund expense ratios and a consequent increase in fund flows. Funds with price-sensitive investors experienced 35% larger inflows. I interpret these results as investor responses to price competition fostered by a reduction in distribution costs.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 3 , May 2023 , pp. 1359 - 1389
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

For helpful comments, I thank an anonymous referee, Jenna Anders, Malcolm Baker, Azi Ben-Rephael, Nittai Bergman, Kirill Borusyak, Jennifer Conrad (the editor), Serdar Dinc, Anastassia Fedyk, Robin Greenwood, Oliver Hart, James Hodson, Eugene Kandel, Owen Lamont, Josh Lerner, Evgeny Mugerman, Darius Palia, Thomas Powers, Michael Reher, Andrei Shleifer, Tanya Sokolinski, Jeremy Stein, and Yishay Yafeh, as well as participants at the 2021 American Finance Association Annual Meeting, and seminars at Harvard University and Rutgers University.

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