Ambiguity,contract,and innovation in financial institutions

The global financial crisis and its aftermath put the structure and performance of the global financial services industry into sharp relief. Questions have been raised as to what intermediaries individually and collectively add to the production of investment returns and social welfare in general. In this article, we look at the roles and responsibilities of investment consultants in relation to asset owners including pension funds, sovereign wealth funds, endowments, and family offices. Focusing upon the relationship between investment consultants and clients, it is argued that this relationship is characterized by ambiguity; there is a (desired) lack of clarity as to the precise roles and responsibilities of both parties. This argument is developed by reference to three prototypical pension funds, distinguished by asset size – a proxy for capabilities and resources. It is shown that although ambiguity may be of benefit to both sides of the market, it can also impose costs on clients, unable or unwilling to remake their relationships with intermediaries. The article highlights instances of innovation where these relationships have been redrawn so as to respond to the challenges of operating in global financial markets.