Evaluating the relationship between IFA remuneration and advice quality

Abstract

This article deals with the interaction between commission remuneration of independent financial advisers and selected sales factors, including the quality of advice. Utilizing data on investment transactions and a linear model with mixed effects, we have found that the link between commission and quality of the subsequent recommendation is not homogeneous, and advice-bias potential is present only in a limited range of organizational environments, connected mainly to the flat-structure business model. On the other hand, arbitrage between different product classes was found to create a biasing potential across almost all types of firms, creating potential for market systemic risk. Finally, the effect of information provided was proved to be significant only to a very limited extent. © 2017 Academy of Financial Services.