Intermediated Investment Management
Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)
University of Wisconsin - Madison - Department of Finance, Investment and Banking
Vienna University of Economics and Business
June 1, 2010
Journal of Finance, Vol. 66, No. 3, pp. 947-980, 2011
EFA 2007 Ljubljana Meetings Paper
AFA 2009 San Francisco Meetings Paper
Intermediaries such as financial advisers serve as an interface between portfolio managers and investors. A large fraction of their compensation is often provided through kickbacks from the portfolio manager. We provide an explanation for the widespread use of intermediaries and kickbacks. Depending on the degree of investor sophistication, kickbacks are used either for price discrimination or aggressive marketing. We explore the effects of these arrangements on fund size, flows, performance and investor welfare. Kickbacks allow higher management fees to be charged, thereby lowering net returns. Competition among active portfolio managers reduces kickbacks and increases the independence of advisory services.
Number of Pages in PDF File: 47
Keywords: investment management, intermediation, investment adviser, kickback
JEL Classification: G20, G23, G28
Date posted: March 25, 2008 ; Last revised: March 18, 2012
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