47 Pages Posted: 25 Mar 2008 Last revised: 18 Mar 2012
Date Written: June 1, 2010
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: 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
By Bing Liang