Bad Advice: Explaining the Persistence of Whole Life Insurance

We conduct a series of field experiments to evaluate two competing views of the role of financial intermediaries in providing product recommendations to potentially uninformed consumers. The first argues that financial intermediaries may provide valuable product education, helping consumers decide which of many complicated products is right for them. Even if commissions influence intermediary recommendations, consumers are sufficiently sophisticated to discount advice. The second, more sinister, view, argues that intermediaries recommend and sell products that maximize the agents well-being, with little regard to the need of the customer. Audit studies in the Indian insurance market find evidence consistent with the second view: agents recommend a product that provides them high commissions, though it is strictly dominated by alternative products. Consumers demonstrating lower levels of sophistication are more likely to be offered the wrong product. Finally, we exploit a natural experiment that occurred during out audits to test how disclosure requirements affect product recommendations. We find that requiring disclosure of commission levels makes agents less likely to recommend the product for which disclosure is required.