An Evaluation of the Principal-agent Problem Between Financial Advisors and their Clients

Open Access
Mccann, Thomas James
Area of Honors:
Interdisciplinary in Finance and Philosophy
Bachelor of Science
Document Type:
Thesis Supervisors:
  • James Alan Miles, Thesis Supervisor
  • Vincent M Colapietro, Honors Advisor
  • Brian Spangler Davis, Honors Advisor
  • principal-agent problem
  • ethics
  • Immanuel Kant
  • Adam Smith
  • financial advisor
  • retail investor
  • financial services
The purpose of this document is to explore the principal-agent problem that exists between financial advisors and their clients. My thesis is that there is an inherent principle-agent problem in the financial services industry that is often exploited. As a result, the current relationship between financial advisors and their clients must be reevaluated. By looking at quantitative methods of evaluating a principal-agent problem and applying it to the world of financial services, it is clear that there are alternatives to a financial advisor that would be better for the retail investor. Due to this fact, a new contract is required to mitigate the principal-agent problem. To create this new contract, I have analyzed the texts of Adam Smith and Immanuel Kant and have drafted their philosophies to better illustrate the actual role of the financial advisor. By adjusting the role of financial advisor to become similar to that of a teacher, and restructuring their payment incentives, the principal-agent problem is lessened and utilizing a financial advisor becomes a more appealing option for the retail investor.