Public opinion is almost universal. Investment managers are overpaid. Given the lack of voice from “the other side” (i.e. investment managers), they either agree or alternatively don’t want to stand out from the crowd on such a sensitive topic.
The public chastising of investment managers has had a long history. Many many years ago, former Prime Minister Paul Keating commented:
“It must get right up their nose, quaffing down the red wine at these fashionable eateries in Bent Street and Collins Street, with the Prime Minister calling them donkeys - but donkeys they are."
And a less aggressive, yet no less subtle Cooper Review Panel mentioned costs 46 times in their 14 page MySuper report released earlier this year.
Why are investors losing out (emotionally or actually?)!
Whilst there are arguably a large number of factors that result in investors “losing out”, the prominent factors that I have observed over many years are as follows:
- Overconfidence: Individuals over-rate their ability and skill. Most of us are above average, or is that just me! When selecting managers, researchers and their clients appear over confident about both their ability to select managers in the first instance, and in their assessment of the likelihood of the manager delivering on its “performance promise”. See last month’s newsletter for more on this...Gamblers anonymous – Super industry hotline
- Negotiation skill deficiency: The Australian superannuation landscape is predominantly an outsourced model for investment management, and many other activities. If there was a skill that every fund should excel at, it is negotiation. However, from my observations, I would not say that it is an area of focused skill development for many funds
- Conflicted consultants: When it comes to investment management fees, implemented consultants are conflicted as any fee discounts achieved on behalf of clients make their outsourcing solutions less competitive. And if you think that a consultant that does not provide implemented solutions will serve you better, then you may want to think again. Some of these consultants will not provide any negotiation assistance as a matter of policy (other than broad guidance – aka industry reports), and feedback from funds is that others are often passive in the negotiation process. See Investment consulting conflict considerations from my July 2009 newsletter, No conflict, no interest: A viewpoint on investment consulting
- Information a-symmetry: There is no independent source of actual investment manager fees data. Industry fee and cost disclosure is a dog’s breakfast, and any analysis based on this published information is misleading at best. See my September 2009 newsletter, Now you Fee it, Now you don’t for more information.
A little knowledge is dangerous?
The Cooper Review Panel (CRP) has missed an opportunity to develop a transparent and comparable fee disclosure regime which neatly deals with the myriad of distortions that are perpetuated by the current fee disclosure requirements. Instead, they are heading down the path of greater prescription and creating further market distortions.
Luckily, CRP (anyone want to buy a vowel – sorry, I should say I do like a lot of their work, but they have no idea when it comes to fees and costs) recommended that:
“An enforceable ‘performance fee standard’ should be developed by APRA in consultation with industry”
If we are going to have realistic solutions around fees, they will clearly need to be industry driven, so these research pieces are important to generate debate and discussion, and avoid further regulatory mess in this area.
Hopefully debate and discussion will help protect the industry from a perpetuating of the current mess which is the Enhanced Fee Disclosure regime (yes, it is called enhanced, and has performed about as well as an enhanced cash product in the GFC!). See my
October 2009 newsletter, Enhanced Fee Disclosure: Distorting behaviour and creating inefficiency for more information.
But will rhetoric lead to lower fees?
Overall, I expect improvement in fee outcomes from debate and discussion that is stimulated by these papers, yet not a quantum change in the level of fees. It will be backward integration or in-sourcing in a Porter’s 5 forces context (just wanted to prove I have an MBA!), that will provide the catalyst for real downward pressure on fees.
Today, it is about portfolio emulation and other multi-manager strategies that data mine stock selections of appointed investment managers, and essentially duplicate their positions (so much for intellectual property rights). These strategies have certainly lowered cost structures, ultimately at the expense of investment manager fees.
However, the real catalyst will be the in-sourcing of investment management activities by large funds over the next 5 to 10 years. This will create real tension on fees and ultimately bring down external investment management costs.
And if you care to navel gaze a bit longer term, this all looks like the re-emergence of the balanced manager, and all its failings. I better dig out Intech’s 1998 multi-manager investment management business plan!
Summary
Rhetoric and reports will have a positive influence on fee structures. Importantly, they will help reduce the risk of regulation creating further distortions and inefficiencies. However, in-sourcing will be the ultimate catalyst for the negotiation pendulum to swing in favour of investors.