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Intermediated Investment Management
Neal Stoughton University of New South Wales Youchang Wu School of Business, University of Wisconsin-Madison Josef Zechner Vienna University of Economics and Business Administration November 2008 EFA 2007 Ljubljana Meetings Paper AFA 2009 San Francisco Meetings Paper Abstract: Intermediaries such as financial advisers and funds of funds serve a vital role in the financial services industry as an interface between portfolio managers and investors. A large fractioon of their compensatioon is often provided through rebates or kickbacks from the portfolio manager rather than directly by their clients. In a model with ratioonal agents we provide an explanation for the widespread use of intermediaries and rebates in compensation practices. We also explore the effects of these arrangements on fund size, flows, performance and investor welfare. Intermediated funds will underperform direct channel funds based on net returns as well as gross returns. Rebates allow higher management fees to be charged, with the consequence that equilibrium fees and net returns are negatively related.
Keywords: investment management, intermediation, investment adviser, kickback JEL Classifications: G20, G23, G28 Working Paper SeriesDate posted: March 25, 2008 ; Last revised: November 28, 2008Suggested CitationContact Information
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