Portfolio Selection and Management Fees: some considerations

The aim of this paper is to study the equilibrium frontier of the management fee due by a Defined Contribution Pension Plan (briefly the Fund) to the Manager, appointed to manage assets purchased with contributions paid by the Fund’s members. We propose a solution based on the classic preferences argument in the context of utility theory, properly taking into account the different levels of risk aversion of participants involved in the results of the financial management. We determine an economically consistent management fee threshold accepted by each participant, respectively the Fund and the Manager; a trading threshold between the two counterparts is found out and it could be considered as a range for a final choice. By considering several rules regulating the management fee, different commission thresholds are defined by means of the expected utility approach.