Feeding the Fee Machine

Fees and expenses are one of the more overlooked aspects of institutional money management. In part, this is due to the opaque nature of financial products and the lack of alignment between sponsors, internal managers and external managers. But it’s time to start taking this much more seriously


If you’re having one of those lovely mornings where everything seems to be going right with the world... stop reading. What follows is downright depressing:

- Most Giants are still paying alpha fees for beta returns.

- Many (most) Giants are still paying the full fee rate to external managers, despite the widespread reports of “fee compression”.

- Asset management fees have actually gotten far worse over the past few decades, as research shows that fees have risen substantially as a percentage of assets managed.

- According to my old college professor Burton Malkiel, “... investors have received no benefit from this increase in expense ratios.”

- Here’s how Tom Brakke explains the situation: “The incredible growth in the industry during the last forty years has resulted in a billionaire’s club made up of the owners of asset management firms, hedge funds, pension consulting organizations, and the like — and tens of thousands of others in the business have gotten plenty rich from the mother load of fees.”


- And here’s Malkiel again over in Justin Fox’s column: “The major inefficiency in financial markets today involves the market for investment advice, and poses the question of why investors continue to pay fees for asset management services that are so high. It is hard to think of any other service that is priced at such a high proportion of value.”

- And if you’re not convinced yet of the lunacy, here’s a lovely anecdote: A hedge fund paid partners more than $100 million over 2 years for returns of -10% then -8.8%. IE The hedge fund partners lost their clients heaps of money... while paying themselves $100 million.

Sigh. The asset management industry is meant to be helping secure the financial welfare of our elderly (pensions), our schools (endowments), our charities (foundations), and even our governments (sovereign funds)... but instead most in the financial services industry today seem to be focused on their own financial security. And... worst of all... the sponsors of these pensions and sovereigns let it all happen. It’s because of this craziness that I do what I do.

I was in a conference yesterday where a ‘Giant’ said that in private assets they typically shoot for strategies that can generate gross returns of 24 or 25 percent because that generally means the net return to them will be something in the mid-teens. I almost fell out of my chair. Can you imagine if even a fraction of that spread was spent on in-house talent? How many great people could you hire?

The sad reality, however, is that fees and expenses tend to be one of the more overlooked aspects of institutional money management. In part this is due to the opaque nature of financial products and the lack of alignment between the people running Giants and the actual sponsors of the Giants (e.g., I literally know of a C-level executive who told staff never to speak about the scale of the fees paid to external managers... it was so embarrassing that this individual worried it would result in the loss of his/her job. Sad.).

Personally, I think expenses should become a far more important conversation for the Giants. I want Boards to demand fee transparency from their management teams and external asset managers. I think CIOs should be forced to keep track of fees paid to external managers on a dollar basis and stop thinking in terms of basis points. (The basis point model was the greatest trick the asset management industry every played on the Giants; so stop playing their games.)

Anyway, here’s a promise: I’m. Doing. Something. About. This. Somebody needs to take on the fee machine. I’m not sure yet what it is, but I’m flippin’ fed up with this lunacy. Watch this space...

Oh and more data on the fee insanity can be found here if you want it.