Transparency.
If you’re still in two minds about financial incentives in the fund industry, and whether or not the rewards for its senior staff have grown too large, you probably won’t be after reading the latest research on executive bonuses.
According to analysis by FTfm, in 2015, the CEOs of the biggest asset management companies in Europe and the US received bonuses that were on average 15 times larger than their salaries. James Kennedy of T Rowe Price was paid a bonus 24 times his regular pay; Larry Fink’s bonus at BlackRock was almost 30 times his salary.
Those ratios are far higher than they are in investment banking and, according to the charity ShareActon, they demonstrate how the bonus culture in asset management is now “out of control”.
No one can argue that a chief executive who performs to a very high standard and whose company delivers substantial value should not be handsomely rewarded. But what is striking about the FTfm data is that, in many cases, the individuals involved have done neither. Some of the biggest bonuses last year went to CEOs whose companies have been struggling.
Far more concerning, though, is the huge disconnect between the financial rewards that fund management staff receive and the lack of value those same companies provide.
People pay managers to outperform the market — to deliver higher returns, after costs, than they could expect from simply investing in low-cost index funds. Yet data from the likes of S&P Dow Jones and Morningstar has consistently shown that only around 1% of investment funds are able to outperform their benchmark for any meaningful period of time.
It is impossible to conceive of any other industry surviving when 99% of its products simply don’t work, let alone rewarding its senior staff with pay packages on a par with those of the stars of Hollywood or Premier League football. Yet the asset management industry is no ordinary industry. It generates eye-watering profits; it has at its disposal vast budgets for PR, marketing and advertising; and it exerts a level of political influence unmatched by any other.
For me, the FTfm data underlines more than anything the importance of transparency — absolute clarity on how much we pay to invest and the net value provided, once all the different fees and charges, many of them hidden, have been taken from our account.
I’ve mentioned in previous posts the Transparency Task Force, a team of volunteers from different walks of life who are trying to to build a financial system that benefits consumers first and foremost, not financiers. I was recently appointed an Ambassador for that organisation.
We at the Task Force firmly believe that the lack of transparency in asset management is closely linked to how its senior staff are remunerated and rewarded. The way that fund managers and found house executives behave is a direct function of how they are incentivised financially. Indeed, the same applies to every other layer of intermediation in the investing industry.
This is a debate we need to be having. What purpose do asset managers serve? Do they add value for investors, for society and the economy? Or do they on balance, as Jack Bogle has claimed, subtract value?
Of course, asset management has to work for those providing it, but most of all it has to work for those who pay for it, namely consumers. If, as I believe, it isn’t working for consumers, how can pay structures be altered to help ensure that it does?
Whatever your view, please join the debate. There’s more information on the work of the Task Force, and how you can get involved, in this video.
Related posts:
Bonuses for fund managers — good or bad?
Why excessive pay for fund managers affects us all
Why should fund managers earn more than accountants?
Video: Andy Agathangelou on the campaign for transparency in asset management
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.
