Many households lack the sophistication required to make complex financial decision, which exposes them to the risk of being exploited when seeking advice from intermediaries. We set up a structural model of financial advice, in which banks aim at issuing their ideal mix of fixed and adjustable rate mortgages and can achieve such goal by setting rates and providing advice to their clientele. “Sophisticated ”households know the mortgage type best for them, whereas “naive” are susceptible to banks’ advice. Using the data on the universe of Italian mortgages, we recover the primitives of the model and quantify the welfare implications of distorted financial advice. The cost of the distortion is equivalent to increasing the annual mortgage payment by 1,177 euros. Losses are bigger for the naive, but sophisticated households suffer as well. However, since even distorted advice conveys information, banning advice altogether is not welfare improving and would instead result in a loss of 736 euros per year on average. A financial literacy campaign is beneficial for all, though in different degrees.

Households frequently seek expert advice when they lack the knowledge or sophistication to determine what financial product is best for their needs. However, advisors may have incentives to distort their recommendations in a way that serves their own needs rather than those of their customers. This is especially likely when households solicit advice from the seller of the financial product itself. We call financial advice “distorted” when it is provided in the interest of advisors, which need not be fully aligned with the customer’s interest. The goal of this paper is to assess the prominence of this phenomenon and quantify its impact on households’ welfare.