We ask why we observe multiple layers of decision-making in fund management with investors, sponsors, fund managers, and consultants, even if additional decision-makers are costly and do not contribute to superior performance. In our model, an investor hires a wealth manager (“sponsor”), who can delegate asset allocation decisions to a fund manager with investing abilities inferior to her own. Delegation results in lower performance but may be chosen because it reduces the sponsor’s reputational risk: Offloading decisions to fund managers creates an additional decision-maker who may be responsible for inferior performance and garbles inferences about the sponsor’s ability. We characterize when excessive delegation arises and the properties of delegation chains.
Financial Markets Group Discussion Papers DP 858
Paul Woolley Centre Discussion Papers No 88