Connections and Conflicts of Interest: Investment Consultants' Recommendations
38 Pages Posted: 30 Jul 2018 Last revised: 31 Jul 2018
Date Written: June 28, 2018
Plan sponsors rely on investment consultants' recommendations for hiring money managers to manage their plan funds. Often these investment consultants have their own investment management firms, or have business connections with investment managers, creating a conflict of interest. I find strong evidence that consultants bias hiring decisions towards their connected managers: a direct connection to a consultant increases a manager's odds of being hired by 637%, while an indirect connection increases the odds by 301%. The hiring decisions are less sensitive to past performance and management fee when connected managers are hired. I further find that, post hiring, the funds managed by the connected managers underperform significantly relative to the funds managed by the unconnected managers.
Keywords: Investment managers; Plan sponsor; Investment consultant; Manager selection; Connections; Conflicts of interest
JEL Classification: G11; G23
Suggested Citation: Suggested Citation