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Intermediated Investment Management





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    • Neal Stoughton is at the School of Banking and Finance at UNSW Sydney. Youchang Wu is at the Wisconsin School of Business at University of Wisconsin-Madison. Josef Zechner is at the Department of Finance, Accounting and Statistics at Vienna University of Economics and Business. 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 Daniel Bergstresser, Fei Ding, Ingolf Dittmann, Alain Durre, David Feldman, David Gallagher, Rick Green, Adolf Hengstschläger, Christopher Hennessy, Ernst Maug, Judy Posnikoff, Scott Schaefer, William Sharpe, and Keith Wong, as well as the helpful suggestions of an anonymous referee and Campbell Harvey (Editor). The paper has been presented at Western Finance Association meetings in 2007, European Finance Association meetings in 2007, Financial Intermediation Research Society meetings in 2008, American Finance Association meetings in 2009, University of Hong Kong, Peking University, University of New South Wales, University of Utah, Erasmus University Rotterdam, University of Mannheim, University of Cologne, Norwegian School of Management (BI), Ca' Forscari (Venice), Claremont-McKenna College, Chapman University, UC Riverside, Nanyang Technological University, National University of Singapore, Singapore Management University, Hong Kong University of Science and Technology, Vienna Graduate School of Finance, and the University of Warwick.


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.