“Investment Management” by Neal M. STOUGHTON
Neal M. STOUGHTON
University of Calgary
Investment advisers perform the role of assisting clients with their investments and distributing portfolio management services. While the vast majority of clients employ advisory services, empirical evidence does not support an economic benefit in terms of higher performance compared to direct investing. Our model features an important role for advisers as they identify active funds with superior performance. However as a result of rational actions by all parties, indirect investing has lower returns than direct investing. We examine the impact of influence activities between a portfolio manager and the set of advisers and document a striking result that such actions will actually lead to more use of investment advisers. In the end, however, it is the direct investors, not the indirect ones who wind up bearing the costs of kickbacks to the advisers and biased asset allocation.