Optimizing Distribution Systems in Asset Management (eBook)

Dr. Philipp Caspar Koch promovierte bei Prof. Dr. Claudia Fantapié Altobelli am Institut für Marketing an der Helmut-Schmidt-Universität Hamburg. Er ist als Berater bei McKinsey & Company, Inc. in München tätig.

Foreword 6
Preface 7
Overview 8
Table of Contents 9
Table of Figures 13
Abbreviations 15
Chapter 1: Institutional Arrangements as a Key Factor of Success 16
Chapter 2: Concept and Methodology for Optimizing Distribution Systems 36
Chapter 3: The Asset Management Sector 101
Chapter 4: Comparative Institutional Analysis 113
Chapter 5: Towards Identifying an Optimized Distribution System 297
Appendix 318
References 326

2.1.3.1 Principal-Agent-Theory (S. 32-33)

The PA has been successfully applied to analyze bilateral relationships in various fields. In the area of marketing, PA has provided an adequate frame to address relevant issues such as sales-force management and channel coordination (Jost 2001b, Bergen, Dutta and Walker 1992). According to Jensen and Meckling (1976, p. 308), agency relationships are defined as a contract under which one or more persons [the principal] engage another person [the agent] to perform some services on their behalf, which involves delegating some decision-making authority to the agent.

Whenever one individual depends on the action of another, an agency relationship arises. In line with this perspective, Krauss (2004, pp. 50-51) describes the interaction between asset management firms and distributors as an agency-relationship. As Göbel (2002, p. 322) outlines, a number of different general perspectives are feasible regarding the relationship between product provider, distributing intermediaries, and end customers. Following this enquiry`s perspective, it is the asset management firm that is considered as the principal that delegates the distribution activities to banks to sell mutual funds to private investors, while banks assume the role of agents.

The key objective of this conceptual approach is to pinpoint to the most efficient contract to organize the specific relationship. In general, efficiency is defined rather from the principal`s perspective. Thus, the optimal contractual arrangement focuses quite extensively on the principal`s objective to create the appropriate incentive structure that induces the agent to advance the principal`s interest. However, the agent`s preferences also need to be taken into account to appropriately motivate the agent to make choices, which will maximize the principal`s welfare (Jensen and Meckling 1976, pp. 308-310). Hence, the efficiency criteria of agency costs are defined as the sum of [monitoring] expenditures by the principal, [bonding] expenditures by the agent, and the residual loss.

When designing the appropriate incentive structure to adequately motivate the agent, the principal needs to be aware of a variety of factors that complicate the designing of the optimal contract. Firstly, while the principal and the agent both pursue their own self-interest, they commonly have diverging and conflicting goals. Furthermore, information regarding the characteristics, the quality, the behavior, and the performance of agents tends to be asymmetrically distributed between principal and agent. Typically, this is information the agent has. For the principal, however, it is either difficult and, thus, costly or even impossible to obtain (Barzel 1982, pp. 28).

Moreover, in the light of environmental uncertainty, meaning that the outcomes of economic activity are beyond the full control of either principal or agent, both differ in their attitude towards risk. Whereas the principal is presumed to have the opportunity to diversify investments and is, therefore, regarded as rather risk-neutral, agents commonly are viewed as risk-averse and prefer some form of insurance against variations in their compensation. Last but not least, this environmental uncertainty also complicates the performance measurement of agents.

In this respect, it is of remarkable importance that the asset management sector is in fact a prominent example of a service sector. Establishing transparency of distribution efforts by turning to some performance measurement is already cumbersome as activities along the entire value chain for mutual funds, most notably the distribution function to private investors, can be best described in terms of intangibility, limited process standardization, outcome-induced quality, and the great pertinence of the integration of the external factor (Corsten 2001, p. 6).