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Portfolio Management Fees: Assets Or Profits Based Compensation?

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Author Info
Javier Gil-Bazo ()

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Abstract

This paper compares assets-based portfolio management fees to profits-based fees. Whilst both forms of compensation can provide appropriate risk incentives, fund managers´ limited liability induces more excess risk-taking under a profits-based fee contract. On the other hand, an assets-based fee is more costly to investors. In Spain, where the law explicitly permits both forms of retribution, assets-based fees are observed far more frequently. Under this type of compensation, the paper provides some insights into how management fees should be determined in order to solve the principal´s trade-off between providing better risk incentives and incurring a lower cost of compensation.

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Paper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb012207.

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Date of creation: Mar 2001
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Handle: RePEc:cte:wbrepe:wb012207

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  1. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June. [Downloadable!] (restricted)
  2. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May. [Downloadable!] (restricted)
  3. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
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  4. Susan Christoffersen & David K. Musto, 1999. "Demand Curves and the Pricing of Money Management," Center for Financial Institutions Working Papers 99-31, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  5. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring. [Downloadable!] (restricted)
  6. Metrick, Andrew & Zeckhauser, Richard, 1998. "Price versus Quantity: Market-Clearing Mechanisms When Consumers Are Uncertain about Quality," Journal of Risk and Uncertainty, Springer, vol. 17(3), pages 215-42, December. [Downloadable!] (restricted)
  7. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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  8. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law & Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
  9. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April. [Downloadable!] (restricted)
  10. Nicolaj Siggelkow, 1999. "Expense Shifting: An Empirical Study of Agency Costs in the Mutual Fund Industry," Center for Financial Institutions Working Papers 99-09, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  11. Leland, Hayne E, 1978. "Optimal Risk Sharing and the Leasing of Natural Resources, with Application to Oil and Gas Leasing on the OCS," The Quarterly Journal of Economics, MIT Press, vol. 92(3), pages 413-37, August. [Downloadable!] (restricted)
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  12. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
  13. Heckerman, Donald G., 1975. "Motivating managers to make investment decisions," Journal of Financial Economics, Elsevier, vol. 2(3), pages 273-292, September. [Downloadable!] (restricted)
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