Question

to what extent do you think agency problems and conflicts of interest are problems in the investment industry? To what extent do you think the internet boom was fueled by such problems?

Answer 1

I think that agency problems and conflicts of interest are significant problems in the investment industry. In the investment industry the principal is the client while the agent is the investment manager. The professional relationship that exists between the investment manager and a client gives rise to agency problems and conflict of interest as well. The client (or the principal) is less informed than the agent (or the investment manager). Hence there is an information asymmetry. This creates a situation in which the interest of the principal and interest of the agent is not well aligned and not properly aligned. Their optimal outcomes will be different. For instance the investment manager is likely to make a financial gain (or avoid a loss) at the expense of a client and this is contrary to the client’s interest.

I think that the internet boom was largely fueled by such problems. Internet boom helps, to a large extent, to remove the problem of information asymmetry. Trading and investing has also become more systematic and many clients use online tools and platforms for this purpose.