Should You Pay for Fund Underperformance?
“While 85% of the equity managers studied underperformed the market in nearly all relevant time periods, the amount of fees extracted globally for this and other financial-intermediation services is in the range of $1.5 trillion annually.”
–Suzanne Duncan, global head of research for State Street’s Center for Applied Research
Since most fund managers fail to beat their own stated performance benchmark, do they always deserve to be paid?
That question should be answered more and it was raised recently by a panel of the CFA Society, which discussed issues related to manger compensation and the problem of balancing long-term investment objectives with short-term performance.
While these are heady issues, the panel did manage to ask the fund managers in attendance if they would be willing to be paid less when they failed to meet their benchmark.
Not surprisingly, the the proposal of rebating money back to clients from fees collected, “when you as manager do not beat your benchmark, sent an air of unease across the audience of mainly investment professionals.”
Not sure what an “air of unease” is, but it is worth noting that portfolio managers do not want to take any risk when it comes to managing your money. Instead, they want you to take all the risk by suffering a portfolio loss and then being forced to pay for it , as well.
Keep that in mind when you watch portfolio managers interviewed on TV as they explain the dangerous world of investing. What they mean is that it is dangerous to you, the investor, not to them as the portfolio manager.
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