intermediatedinvestmentmanagement - nus business school.pdf

IntermediatedInvestmentManagement NealM.Stoughton YouchangWu UniversityofNewSouthWales UniversityWisconsin-Madison JosefZechner ViennaUniversityofEconomicsandBusinessAdministraon FirstDra: April2006 ThisDra: November2008 Abstract Intermediariessuchasfinancialadvisersandfundsoffundsserveavitalroleinthefinancialservices industryasaninterfacebetweenporoliomanagersandinvestors. Alargefraconoftheircompensa- onisoenprovidedthroughrebatesorkickbacksfromtheporoliomanagerratherthandirectlyby theirclients. Inamodelwithraonalagentsweprovideanexplanaonforthewidespreaduseofinter- mediaries and rebates in compensaon pracces. We also explore the effects of these arrangements on fund size, flows, performance and investor welfare. Intermediated funds will underperform direct channelfundsbasedonnetreturnsaswellasgrossreturns. Rebatesallowhighermanagementfeesto becharged,withtheconsequencethatequilibriumfeesandnetreturnsarenegavelyrelated. JELClassificaon: G20,G23,G24 Keywords: investmentmanagement,intermediaon,investmentadviser,kickback We thank the Gutmann Center for Porolio Management at the University of Vienna for financial support, as well as the SocialSciencesandHumaniesResearchCouncilofCanada(SSHRC).WealsoappreciatehelpfuldiscussionswithIngolfDimann, AlainDurre,FeiDing,DavidFeldman,DavidGallagher,RickGreen,ChristopherHennessy,AdolfHengstschlager,ErnstMaug,Judy Posnikoff,ScoSchaefer,WilliamSharpeandKeithWong. ThepaperhasbeenpresentedatWesternFinanceAssociaonmeengs in 2007, European Fin