The Quality-Assuring Role of Mutual Fund Advisory Fees

44 Pages Posted: 24 Feb 2015

See all articles by Michel A. Habib

Michel A. Habib

University of Zurich; Swiss Finance Institute

D. Bruce Johnsen

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

Date Written: February 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: advisory fees, closet indexing, excessive fees, open-access, quality-assurance

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 2015). CEPR Discussion Paper No. DP10438, Available at SSRN: https://ssrn.com/abstract=2569267

Michel A. Habib (Contact Author)

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

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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