Are Some Clients More Equal Than Others? An Analysis of Asset Management Companies’ Execution Costs*

Abstract

Pension plan sponsors often manage their portfolios via multiple management companies. We find that some plans receive systematically better prices when management companies trade the same stock, on the same day, in the same direction for multiple clients. The number of management companies per client is an important predictor of being a favored or disfavored client, consistent with competition over clients. Average magnitudes of transfers across clients are as large as 0.50% of dollar trade volume. We find that these transfers are larger when opportunities are greater, when clients are newer, and around year-end when client attention is high. Moreover, clients who benefit reward management companies with as much as a 50% increase in future dollar trading volume. We rule out alternative explanations such as market timing skill, directed brokerage arrangements and different trading practices. We interpret the collective results as evidence of conflicts of interest.