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Innovation and shirking in financial markets

Innovation is usually viewed by economists as a productivity-enhancing force, powering economic growth in modern capitalist societies. This is just as true in the investment industry, where new products are assumed to help consumers meet their individual financial needs. This optimistic view ignores the damage that can be done by innovations, especially in the financial sector, where agency issues create the potential for negligence and rent extraction.

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Asset mispricing: the ignored externality

The externalities of greatest interest in contemporary discussion typically fall under the E, S and G headings. However, this leaves a critically important externality – that of asset mispricing – largely ignored. Asset owners should broaden their awareness of the externalities that arise from their investment approach.

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The transparency fallacy

One of the recommendations emerging from the recent CMA review into the investment consulting marketplace is for greater transparency around fiduciary manager performance. The resulting proposal has garnered almost universal support, but may create some damaging unintended consequences.

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