Connections and Conflicts of Interest: Investment Consultants' Recommendations

59 Pages Posted: 30 Jan 2018 Last revised: 1 Jun 2021

Date Written: June 2, 2017

Abstract

Plan sponsors rely on investment consultants' recommendations when hiring investment managers to manage plan funds. These investment consultants often have their own investment management firms, or they have business connections with investment managers, creating a conflict of interest. I find strong evidence that consultants bias hiring decisions toward their connected managers: a connection to the consultant increases a manager's odds of being hired by 500%. Hiring decisions are less sensitive to past performance for connected managers. Post hiring, the funds managed by connected managers underperform significantly relative to the funds managed by unconnected managers.

Keywords: Investment Manager, Plan Sponsor, Investment Consultant, Manager Selection, Connections, Conflicts of Interest

JEL Classification: G11, G20, G23, G28

Suggested Citation

Jaiswal, Shikha, Connections and Conflicts of Interest: Investment Consultants' Recommendations (June 2, 2017). Available at SSRN: https://ssrn.com/abstract=3106528 or http://dx.doi.org/10.2139/ssrn.3106528

Shikha Jaiswal (Contact Author)

UNSW Business School ( email )

Sydney, NSW 2052
Australia

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