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Intermediated Investment Management

47 Pages Posted: 25 Mar 2008 Last revised: 18 Mar 2012

Neal Stoughton

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Youchang Wu

University of Oregon - Lundquist College of Business

Josef Zechner

Vienna University of Economics and Business

Date Written: June 1, 2010

Abstract

Intermediaries such as financial advisers serve as an interface between portfolio managers and investors. A large fraction of their compensation is often provided through kickbacks from the portfolio manager. We provide an explanation for the widespread use of intermediaries and kickbacks. Depending on the degree of investor sophistication, kickbacks are used either for price discrimination or aggressive marketing. We explore the effects of these arrangements on fund size, flows, performance and investor welfare. Kickbacks allow higher management fees to be charged, thereby lowering net returns. Competition among active portfolio managers reduces kickbacks and increases the independence of advisory services.

Keywords: investment management, intermediation, investment adviser, kickback

JEL Classification: G20, G23, G28

Suggested Citation

Stoughton, Neal and Wu, Youchang and Zechner, Josef, Intermediated Investment Management (June 1, 2010). Journal of Finance, Vol. 66, No. 3, pp. 947-980, 2011; EFA 2007 Ljubljana Meetings Paper; AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=966255

Neal M. Stoughton (Contact Author)

Vienna University of Economics and Business ( email )

Austria

Vienna Graduate School of Finance (VGSF) ( email )

Austria

Youchang Wu

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Josef Zechner

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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