intermediated investment strongmanagementstrong - univie.ac.at.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: November 2006 Abstract Investment advisers perform the role of assisting clients with their investments and distribut- ing portfolio management services. While the vast majority of clients employ advisory services, an important issue is how well advisers perform in this capacity. Our theoretical model analyzes the impacts on portfolio performance, fund flows, fund sizes and welfare from the use of advisers. An important aspect of our analysis is the extent to which conflicts of interest such as influence activ- ity can bias the asset allocation decisions of advisers. Interestingly advisory services are utilized to a greater extent under this circumstance. We show that investment advisers help to improve social welfare, but much of the welfare gain is extracted by the portfolio manager. When influence activity is feasible, investors welfare is adversely affected by the presence of advisers. 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 David Feld- man, David Gallagher, Rick Green, Adolf Hengstschläger, Ernst Maug, Judy Posnikoff, William Sharpe and Keith Wong. The paper has been presented at Hong Kong University, Peking University, the University of New South Wales, the University of Mannheim, the Norwegian School of Management (BI), Ca