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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 Series

Date posted: March 25, 2008 ; Last revised: December 23, 2009

Suggested Citation

Stoughton, Neal M., Wu, Youchang and Zechner, Josef, Intermediated Investment Management (November 1, 2008). EFA 2007 Ljubljana Meetings Paper; AFA 2009 San Francisco Meetings Paper. Available at SSRN: http://ssrn.com/abstract=966255


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Contact Information

Neal M. Stoughton (Contact Author)
University of New South Wales (UNSW) ( email )
School of Banking and Finance
UNSW
Sydney , NSW 2052
Australia
Youchang Wu
School of Business, University of Wisconsin-Madison ( email )
Grainger hall, 975 University Avenue
Madison, WI 53706
United States
Josef Zechner
Vienna University of Economics and Business Administration ( email )
Augasse 2-6
Vienna, Wien A-1090
Austria
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