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Motivating and Compensating Investment Advisors

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  • Wei-Lin Liu

    (Michigan State University)

Abstract

This paper considers the problem of how an investor can optimally motivate an investment advisor to exert costly effort to gather valuable investment information. We show that compensation schemes that are increasing in the investment payoffs may fail to optimally motivate the advisor. We then characterize the conditions under which the private nature of the advisor's acquired information affects how he is optimally motivated to work diligently and present the resulting optimal compensation. We establish the conditional optimality of benchmark-indexed compensation and provide an explanation to the limited use of such compensation schemes in practice.

Suggested Citation

  • Wei-Lin Liu, 2005. "Motivating and Compensating Investment Advisors," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2317-2350, November.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2317-2350
    DOI: 10.1086/497046
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    Cited by:

    1. Angela A. Hung & Joanne K. Yoong, 2010. "Asking for Help Survey And Experimental Evidence on Financial Advice and Behavior Change," Working Papers WR-714-1, RAND Corporation.
    2. Joanne K. Yoong & Angela Hung, 2009. "Self-Dealing and Compensation for Financial Advisors," Working Papers 713, RAND Corporation.
    3. Cuoco, Domenico & Kaniel, Ron, 2011. "Equilibrium prices in the presence of delegated portfolio management," Journal of Financial Economics, Elsevier, vol. 101(2), pages 264-296, August.
    4. Joanne K. Yoong & Angela A. Hung, 2009. "Self-Dealing and Compensation for Financial Advisors," Working Papers WR-713, RAND Corporation.

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