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Money Doctors

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  • Nicola Gennaioli
  • Andrei Shleifer
  • Robert Vishny

Abstract

We present a new model of investors delegating portfolio management to professionals based on trust.� Trust in the manager reduces an investor’s perception of the riskiness of a given investment, and allows managers to charge fees.� Money managers compete for investor funds by setting fees, but because of trust fees do not fall to costs.� In equilibrium, fees are higher for assets with higher expected return, managers on average underperform the market net of fees, but investors nevertheless prefer to hire managers to investing on their own.� When investors hold biased expectations, trust causes managers to pander to investor beliefs.�

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Paper provided by Harvard University OpenScholar in its series Working Paper with number 69721.

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Handle: RePEc:qsh:wpaper:69721

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  1. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
  2. Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," NBER Working Papers 9275, National Bureau of Economic Research, Inc.
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  15. Diane Del Guercio & Jonathan Reuter & Paula A. Tkac, 2010. "Broker Incentives and Mutual Fund Market Segmentation," NBER Working Papers 16312, National Bureau of Economic Research, Inc.
  16. Javier Gil-Bazo & Pablo Ruiz-Verd�, 2009. "The Relation between Price and Performance in the Mutual Fund Industry," Journal of Finance, American Finance Association, American Finance Association, vol. 64(5), pages 2153-2183, October.
  17. John Chalmers & Jonathan Reuter, 2012. "What is the Impact of Financial Advisors on Retirement Portfolio Choices and Outcomes?," NBER Working Papers 18158, National Bureau of Economic Research, Inc.
  18. Péter Kondor & Ron Kaniel, 2011. "The delegated Lucas tree," 2011 Meeting Papers, Society for Economic Dynamics 580, Society for Economic Dynamics.
  19. Malkiel, Burton G, 1995. " Returns from Investing in Equity Mutual Funds 1971 to 1991," Journal of Finance, American Finance Association, American Finance Association, vol. 50(2), pages 549-72, June.
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  21. Utpal Bhattacharya & Andreas Hackethal & Simon Kaesler & Benjamin Loos & Steffen Meyer, 2012. "Is Unbiased Financial Advice to Retail Investors Sufficient? Answers from a Large Field Study," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 25(4), pages 975-1032.
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Cited by:
  1. Thomas M. Eisenbach & Martin C. Schmalz, 2013. "Up close it feels dangerous: 'anxiety' in the face of risk," Staff Reports, Federal Reserve Bank of New York 610, Federal Reserve Bank of New York.

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