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Intermediated Investment Management
Neal Stoughton University of New South Wales (UNSW) Youchang Wu School of Business, University of Wisconsin-Madison Josef Zechner Vienna University of Economics and Business Administration November 1, 2008 EFA 2007 Ljubljana Meetings Paper AFA 2009 San Francisco Meetings Paper Abstract: Intermediaries such as financial advisers and funds of funds serve an important role in the financial services industry as an interface between portfolio managers and investors. A large fraction of their compensation is often provided through rebates or kickbacks from the portfolio manager rather than directly by their clients. We provide an explanation for the widespread use of intermediaries and rebates in compensation practices. Depending on the degree of investor sophistication, rebates are used by the portfolio manager either as a price discrimination mechanism or to support aggressive marketing efforts. We explore the effects of these arrangements on fund size, flows, performance and investor welfare. Rebates allow higher management fees to be charged, thereby lowering net returns. Competition among active portfolio managers reduces the usage of rebates and increases the independence of advisory services.
Keywords: investment management, intermediation, investment adviser, kickback JEL Classifications: G20, G23, G28 Working Paper SeriesDate posted: March 25, 2008 ; Last revised: December 23, 2009Suggested CitationContact Information
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