Fiduciary Finance

Fiduciary Finance

Investment Funds and the Crisis in Financial Markets

Martin Gold

This multi-faceted analysis of institutional investment defines ‘fiduciary finance’ institutions as the third pillar of the financial system, alongside banks and insurers. It documents the role played by investment funds and the money management industry during the recent financial crisis, and provides an unashamedly critical review of the business disciplines which can dominate investment practices. It clarifies the economic significance of the investment industry (circa $60 trillion in assets) and the features which differentiate fiduciary finance from traditional financial institutions such as banks and insurers.

Chapter 6: The Gatekeepers of Fiduciary Finance

Martin Gold

Subjects: economics and finance, money and banking


INTRODUCTION Investment consultants – the specialist investment advisors to pension fund trustees and important ‘gatekeepers’ of fiduciary finance – have received relatively superficial scrutiny within the scholarly literature. These gatekeepers exert significant economic influence over the investment business because fund managers depend directly upon their recommendations for new mandate awards and profitability. Investment consultants also define the ‘rules of the investment game’ by setting the frameworks for fund manager selection, undertaking performance evaluation and devising incentive structures (such as performance-based fees). Trustees of pension funds have been criticized as being weak customers who are heavily reliant upon the advice provided by investment consultants (HM Treasury, 2004, p. 8). These criticisms, and the high levels of market concentration which exist in the investment consulting industry, have created concerns about a lack of diversity in investment advice available to pension trustees. Little has been written about the changing role of these gatekeepers and their expanding influence within fiduciary finance. This chapter therefore examines the gatekeepers’ influence within Australia’s fiduciary finance industry using two unique inquiries. First, using a large sample of Australian pension funds, it examines the influence of investment consultants over new business flows and the resulting fund manager–gatekeeper interdependencies within Australia’s fiduciary finance industry. Second, using a product-focused approach, it explores a controversial fiduciary product innovation known as ‘implemented consulting’ which sees the gatekeepers becoming fund managers while continuing to act as independent advisors to pension funds. The chapter is structured as follows. The first section provides an overview of Australia’s...

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