Financial Intermediaries and Agency Problems With and Without Vertical Incentives

I study agency problems between brokers and investors in the retail bond market. Thepresence of suitability or fiduciary regulations, which govern transactions in this setting, canlead to tensions for brokers between maximizing their own profit and acting in the best interestsof their customers. This paper measures the degree to which these conflicting incentivesinfluence brokers by examining the U.S. reverse convertible bond market. While brokers doconsider the profits of investors when making decisions, I estimate that their own profits areroughly three times more important, suggesting the existence of severe agency problems thatreduce consumer welfare