intermediated investment strongmanagementstrong - efma.pdf

Intermediated Investment Management Neal M. Stoughton Youchang Wu Josef Zechner University of Calgary University of Vienna University of Vienna First Draft: April 2006 This Draft: March 2007 Abstract A majority of mutual funds are sold through brokers. This paper explores the effects of interme- diation through brokers and financial advisers on portfolio performance, fund flows, fund sizes, fees and welfare. We show that advisers facilitate the participation of small investors in an actively man- aged fund. Surprisingly, advisory services are utilized to a greater extent when advisers are subject to influence from the portfolio manager. Our model can explain underperformance of an actively managed portfolio relative to a passive benchmark, as well as the underperformance of funds sold through brokers relative to those sold directly. We show that advisory services improve overall social welfare although investors are harmed whenever influence activities are present. JEL Classification: G20, G23, G24 Keywords: investment management, intermediation, investment adviser, influence activity We thank the Gutmann Center for Portfolio Management at the University of Vienna for financial support, as well as the Social Sciences and Humanities Research Council of Canada (SSHRC). We also appreciate helpful discussions with Ingolf Dittmann, David Feldman, David Gallagher, Rick Green, Christopher Hennessy, Adolf Hengstschläger, Ernst Maug, Judy Pos- nikoff, William Sharpe and Keith Wong. The paper has been presented at Hong Kong University, Peking University, University of New So