CHAPTER 14Incentives, Ethics, and Policy
Chapter Outline
- 14.1 Introduction
- 14.2 The Investment Company Business Model
- 14.3 Incentives for Businesspeople and Portfolio Managers
- 14.4 Ethical Situations
- 14.5 Industry Guidelines for Good Business Practices
- 14.6 Internal Company Policies to Protect the Franchise
- 14.7 Effective Manager and Analyst Compensation Policies
14.1 INTRODUCTION
A successful investment management business requires thoughtful business practices as well as effective portfolio management. Chapters 1–13 of this book have described techniques to manage investment portfolios. Risk and performance goals were defined, and strategies were proposed to attain those goals. It was generally assumed that portfolio managers would set goals and act in the best interests of their clients. This chapter takes a different tack. It examines the motivation and implications of portfolio managers acting in their own best interests.
This chapter discusses the business incentives for portfolio managers who are hired by investment clients. These clients may include institutional investors such as pension plans, endowments and foundations, or individual clients, including mutual fund, high-net-worth, and 401(k) investors. The rewards for success in the investment business can be large, and as a result the incentives are strong for growing assets under management. Each of these client groups has unique goals, but ...