The Effect of Advisors’ Incentives on Clients’ Investments

Advisor compensation changes causally redirect client investments, especially new money, while financial knowledge and better-aligned incentives reduce the resulting welfare losses.

• Using granular data from a Spanish investment firm and the January 2018 MiFID II reform, the study compares the same advisor-fund relationships before and after trailer-fee changes; placebo tests show no comparable shifts where fees were unchanged.
• Client portfolios adjusted toward funds offering stronger incentives to advisors over approximately 18 months, mainly through new contributions rather than systematic sales of existing holdings.
• The estimated elasticity between trailer fees and investments was approximately 150% for new clients, about three times the effect for existing clients.
• Incentive effects were stronger for clients with longer advisor relationships and greater social or geographic proximity, suggesting that trust can amplify conflicts rather than eliminate them.
• Estimated welfare losses from conflicted advice were approximately 6% for existing clients and 9% for new clients before the reform, versus 1.3% and 3.4% for clients with high financial knowledge.

Takeaway: Compensation architecture is an investment-process issue, not merely a disclosure matter; MiFID II reduced estimated welfare losses by roughly one-fifth to one-half, while oversight should focus especially on onboarding and new capital contributions.