Delegated Asset Management and Performance When Some Investors Are Unsophisticated

50 Pages Posted: 9 Aug 2021

See all articles by Steven G. Malliaris

Steven G. Malliaris

University of Georgia - Department of Banking and Finance

A. (Tassos) G. Malliaris

Loyola University Chicago

Date Written: August 5, 2021

Abstract

Households with limited financial expertise sometimes attempt to avoid investment mistakes by delegating the management of their investments to experts. However, evidence on the efficacy of delegation has been mixed. This paper contributes to understanding the question: why is the acquired expertise of asset managers a limited substitute for investors' lack of expertise? We consider an economy with investors (who vary in sophistication) and managers (who vary in skill). Unsophisticated investors' lack of expertise makes it hard for them to distinguish skilled managers from unskilled ones. In the equilibrium that follows, investors exert little effort when searching for managers, leading to a suboptimal composition of managerial types entering the market. When unsophisticated investors are endowed with weak signals, they attempt to time their entry and exit from the market for managers, but their actions are predictable, so performance continues to suffer.

Keywords: delegated asset management, financial risks, financial advice, expertise, career concerns, reputation, market timing

JEL Classification: G11, G18, G23, G53

Suggested Citation

Malliaris, Steven G. and Malliaris, A. (Tassos) G., Delegated Asset Management and Performance When Some Investors Are Unsophisticated (August 5, 2021). Available at SSRN: https://ssrn.com/abstract=3900219 or http://dx.doi.org/10.2139/ssrn.3900219

Steven G. Malliaris (Contact Author)

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

A. (Tassos) G. Malliaris

Loyola University Chicago ( email )

16 E. Pearson Ave
Quinlan School of Business
Chicago, IL 60611
United States
312-915-6063 (Phone)

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