Game theory suggests that the manufacturers of financial services benefit from the credibility conferred by truly independent advice, according to new research from a trio of economists.

The paper by Patrick Bolton from Princeton University and Xavier Freixas and Joel Shapiro of Universitat Pompeu Fabra, finds that, “If independent financial advisers are able to provide reliable information, this increases product differentiation and therefore market power, so that it is in the interest of financial intermediaries to promote external independent financial advice.”

The paper develops a model of competition based around the information that financial firms are willing to reveal to prospective customers. They assume that in the market for financial services, sellers have better information than buyers regarding the matching between the buyer’s needs and the good’s actual characteristics. “Depending on the market structure, this may lead to conflicts of interest and/or the under-provision of information by the seller,” they suggest.

The paper concludes that, “although conflicts of interest may prevent information disclosure under monopoly, competition forces full information provision for sufficiently high reputation costs.” They also find that banks offering multiple products “will use information strategically to increase product differentiation and therefore will always provide reliable information and charge higher prices than specialized banks.”

“Financial intermediaries may actually have an incentive to separate advice from sales as it could allow them to differentiate their products and receive higher margins,” they say.