Does commission remuneration affect the investor’s outcome? Experience from Central Europe
| DOI | https://doi.org/10.1108/JFRC-10-2018-0141 |
| Pages | 494-508 |
| Date | 28 August 2019 |
| Published date | 28 August 2019 |
| Author | Jiří Šindelář,Petr Budinský |
| Subject Matter | Financial compliance/regulation,Accounting & Finance,Financial risk/company failure |
Does commission remuneration
affect the investor’s outcome?
Experience from Central Europe
Ji
rí Šindelá
rand Petr Budinský
University of Finance and Administration, Prague, Czech Republic
Abstract
Purpose –This paper aims to deal with the conflict of interest in the area of investment advice,
rewarded through the commission mechanism. Using a substantial data set on sales of independent
agents, the authors have examined the relationship between the amount of commission paid to the agent
and the subsequent performance of the client’s portfolio (annualised five-year returns, volatility and
total expenses ratio).
Design/methodology/approach –The main working method consisted of linear model with mixed
effects. Processing total amountof 2,066 advised sales from, the authors were able to examine not only the
general level of aforementioned relationship but also the effect of different organisational environments,
ranging frommulti-level marketing (MLM), pool to flat structures.
Findings –Contrary to general expectations, the authors have found that investment advisers do
recommend products with generally higher costs and volatility, but in the MLM networks, they are at the
same timeable to generate significantly higher returns on recommendedfunds.
Research limitations/implications –Due to the setting of this study, the authors were only able to
cover the vital period of 2007-2018, mostly the “good times”in the region’s economy. Such limitation
representsguideline for further longitudinal research,which will be followed in the next analytical steps.
Practical implications –The results are of interest bothto policymakers and final consumers.The first
group can better adjustrules in the inducements and advice area, to stimulate shift in different organisational
environments. Clients,on the other hand, receive additional guidance on which types of companies generally
offer the most beneficialadvice.
Originality/value –Although research on advice and conflict of interest is prevalent, the meta-analysis
shows thatonly few authors were able to quantitatively disseminatethe relationship between remunerationof
advisor and subsequent utility of the client. The findings are unique in this regard, bringing statistically
conclusive results from region of Central Europe, where advice represents one of the principal distribution
channels.
Keywords Investment funds, Agent principal problem, Conflict of interests, Investment advice
Paper type Research paper
1. Introduction
Remuneration of sales agents through the commission channel and its interaction with
investors’utility remains a volatile topic in concurrent research. On one hand, European
regulators view investment advicebased on commission as inherently prone to a conflict of
interest and an investor mis-benefit, as stated e.g. in the EIOPA (2016, p. 41) advice on the
Pan-European PensionProduct (PEPP):
JEL classification –D82, D140, G18
This paper was created with the contribution of institutional support for long-term conceptual
development of the research organisation University of Finance and Administration.
JFRC
27,4
494
Received1 November 2018
Revised28 March 2019
17June 2019
Accepted20 June 2019
Journalof Financial Regulation
andCompliance
Vol.27 No. 4, 2019
pp. 494-508
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-10-2018-0141
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