The changing incentive structure of institutional asset managers: implications for financial markets

This article presents the principal findings of the Working Group on Incentive Structures in Institutional Asset Management set up under the aegis of the Commitee on the Global Financial System (CGFS). These findings, which have recently been published in a report, aim to give the central bank community – and beyond that, the financial community – a better understanding of ongoing developments in the fund management industry and their potential implications for financial markets. The report, based on a comprehensive literature review and extensive interviews with market practitioners, has identified various features and trends in the industry with a potential effect on the functioning of financial markets. However, as many of these effects are at least partially offsetting, the lack of reliable empirical evidence has not allowed the working group to come to a clear-cut conclusion on the aggregate effect of these various features and trends at the current juncture. Still, one broad conclusion may be drawn from this report: ongoing and future developments in the fund management industry have the potential to change institutional behaviour in ways that can be important for financial markets. This relates to the general issue of preserving the diversity of investment behaviour, and partially results from the fact that parts of the institutional asset management industry have moved towards becoming a «commodity» industry offering investors more and more standardised investments products and approaches. Therefore, developments in the industry may require further attention by the financial community as a whole. More specifically, the report points to four broad areas where particular attention should be paid: risk management and disclosure, conflicts of interest, explicit and implicit barriers to market entry, and regulatory trade-offs.