Academics Assess Incentives Resulting from Asset Manager-Brokerage Ties

Academics from the University of Notre Dame in a recent paper argue that there are strong incentives for asset managers to support the financial stability of their brokers’ financial conglomerates and thus act as buyers of last resort in stressful markets for brokers that provide more valuable investment services.  The paper describes the mutually beneficial relationship between asset managers and brokerage firms, noting that both asset managers and brokers are incentivized to maintain strong relationships in their competition for investors and valuable market information. Brokers provide prime services and share information with their most valuable clients, the academics write, and as time evolves, “repeated interactions between asset managers and their brokers create incentives for both parties to preserve strong business ties.”  The paper argues that these strong business ties also create incentives for asset managers to support the financial stability of their brokers’ financial conglomerates. “There is evidence that funds provide an insurance pool against temporary liquidity shocks to other funds in the fund family. … Similarly, funds may invest in the brokers’ parent stocks with the aim of providing liquidity during distress times.” The authors say their research suggests that business networks between financial institutions and their clients have broader implications for the systemic risk of the financial sector.