Principal and Agent Problems in Australian Responsible Entities

Abstract

Since 1998, the Australian funds management industry has seen the creation of the single responsible entity. The introduction of the single responsible entity unifies the role of trustee and investment manager in a legal entity for the purpose of managing investment funds. This paper argues that this dual role of the single responsible entity causes severe principal and agent problems in the Australian managed funds industry. As a result, the single responsible entity benefits the investment manager, but it comes at a cost and risk to investors. These costs are not visible during favourable economic times, but become more evident when investment market conditions deteriorate as evidenced during the 2007-2008 global financial crisis (GFC).