How Much Labor Do You Need to Manage Capital?

Abstract

Using a new dataset on employment at SEC-registered investment advisors, we analyze which clienteles, asset classes, and strategies require more human capital, as well as the value of human capital to investment managers. Controlling for assets, quantity of human capital is not associated with better returns. However, employing more advisory personnel is associated with more future assets under management, justifying the employees’ costs from the firm’s point of view. More human capital-intensive firms also manage portfolios that exhibit the hallmarks of closet indexing such as lower active share and lower tracking error of benchmarks. Our results are consistent with the hypothesis that marketing and client services are the main responsibility and means of adding value for most investment professionals in the asset management industry.

Keywords: RIAs, Asset Management, Fund Flows

JEL Classification: G12, G20, G23