Competing for Consumers in Financial Markets under a Fee-Based Compensation System for Advisors

In financial markets where consumers can only be reached through an advisor, product providers usually compete indirectly for consumers through commissions to advisors. Therefore, a regulatory ban on commissions may restrict this competition. We formulate a theoretical model in order to study the impact of such a ban on competition between product providers and analyze whether competition may take place through other channels than commissions. In a market with sufficiently differentiated products, competition through prices is not beneficial for product providers and does not take place in equilibrium. However, similar to commissions, advertising may serve as a competitive tool for product providers to attract consumers away from their competitors, since advertising may influence an advisor's product recommendation if he faces costly persuasion of consumers. The extent to which product providers engage in advertising depends crucially on their respective market share and the advisor's responsiveness to their attempts to steer his product recommendations.