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The Quality-Assuring Role of Mutual Fund Advisory Fees

44 Pages Posted: 30 Sep 2012 Last revised: 25 Feb 2015

Michel A. Habib

University of Zurich; Swiss Finance Institute

D. Bruce Johnsen

George Mason University - School of Law; PERC - Property and Environment Research Center

Multiple version iconThere are 2 versions of this paper

Date Written: February 20, 2015

Abstract

Active fund managers implicitly promise to research profitable portfolio selection. But active management is an experience good subject to moral hazard. Investors cannot tell high from low quality up front and therefore fear manager shirking. We show how the parties mitigate the moral hazard by paying the manager a premium fee sufficiently high that the manager’s one-time gain from shirking is less than the capitalized value of the premium stream he earns from maintaining his promise to provide high quality. Premium advisory fees act as a quality-assuring bond. Our model has a number of revealing extensions and comparative statics.

Keywords: excessive fees, advisory fees, quality-assurance, open-access, closet indexing

JEL Classification: D23, D86, G23, L22

Suggested Citation

Habib, Michel A. and Johnsen, D. Bruce, The Quality-Assuring Role of Mutual Fund Advisory Fees (February 20, 2015). George Mason Law & Economics Research Paper No. 12-64. Available at SSRN: https://ssrn.com/abstract=2154275 or http://dx.doi.org/10.2139/ssrn.2154275

Michel A. Habib

University of Zurich ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland
41-44-634-2507 (Phone)
41-44-634-4903 (Fax)

HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

D. Bruce Johnsen (Contact Author)

George Mason University - School of Law ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8066 (Phone)
703-993-8088 (Fax)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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