In a recent opinion piece for the CFA Institute, the renowned Charlie Ellis had an interesting anecdote about the asset management industry:
“While asset-based fees have increased substantially over the past 50 years — more than fourfold for both institutional and individual investors — investment results have not improved.”
Sigh. That’s crazy. As I’ve said before, the current state of asset management fees and costs has lost touch with reality. Anyway, this is precisely why Ellis asks:
“Are any other services of any kind priced at such a high proportion of client-delivered value?" I can't think of one. Can you?
"Can active investment managers continue to thrive on the assumption that clients won’t figure out the reality that, compared with the readily available passive alternative, fees for active management are astonishingly high?”
I hope not.
Actually, I think that we’re getting close to a tipping point. Why? Because institutional investors do seem to be focused more and more on costs and fees. They would appear to understand that a dollar saved in terms of fees or costs is worth more than a dollar earned (thanks to taxes). And an investment in cost and fee reduction provides far greater returns per unit of risk than anything else an investment organization can do. As such, many are seeing policies focused on fee and cost reductions as a no brainer.
Unfortunately, however, scholarly research of the highest qualityshows that portfolio managers remain quite adept at gaming institutional investors on performance fees; claw-backs and performance-based compensation don’t cut it apparently. In fact, the research shows that the two-part fee structure that is pervasive in alternative assets comes with some particularly perverse incentives and does little to identify managers that can truly generate alpha. And this means there are plenty of "alpha mimics" out there getting rich off alpha fees, which is unfortunate.
Notwithstanding, as we enter a low return environment, the focus on costs and fees will become more common among institutional investors. And that, in my view, is a good thing. The fight continues.