It’s a mark of how successful fund industry PR and advertising is that most people consider fund managers rather glamorous people. We tend to focus on their skill, their intelligence and their ability to take risks under pressure — all of which are amply rewarded, of course, with superstar salaries and bonuses.
The bottom line, however, is that fund managers are financial stewards. People entrust them with their worldly wealth. Yes, of course they expect them to have an eye for the main chance, and to sniff out opportunities to make their money grow. But, on a more basic level, the least an investor should expect of a fund manager is that he or she will respect their wealth, protect it, and certainly not be reckless with it.
How depressing, then, to read in the Financial Times a claim by a former fund management executive that the management industry “has wasted hundreds of billions of pounds of client money over the past few decades paying banks for extras such as company meetings and research”.
Michael Hufton, a former partner at Cazenove & Co., calculates that a fund manager with £5 billion of assets who changes the stocks in their portfolio twice a year would on average would pay at least £10m of investors’ money to City banks each year. In fact, most fund managers change their stocks more frequently, so even that is a conservative figure.
As everyone who reads this column regularly knows, controlling investment costs is hugely important. The more you pay to invest, the harder it is to outperform.
To a large extent, investors can control costs themselves. But those who invest in actively managed funds ultimately can’t control what they pay. Yes, each fund will quote an annual management charge, but the final amount you end up paying is unknown. Ultimately it depends on how much trading your particular funds do and the costs incurred in the process.
Thankfully, as the FT article points out, there are encouraging signs that asset managers are looking to cut the amount they spend on company meetings and research.
But it’s galling in the extreme that such a cavalier attitude towards clients’ hard-earned money has existed for so long. Money that could have been used towards the future financial security of ordinary investors has been channelled instead to some of the world’s wealthiest banks in return for vastly overpriced services.
Is that really an example of faithful financial stewardship? Surely not.
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
