Connections and Conflicts of Interest: Investment Consultants' Recommendations
59 Pages Posted: 30 Jan 2018 Last revised: 1 Jun 2021
Date Written: June 2, 2017
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: Suggested Citation