Top 10 Things That Need Fixing in the
The investment industry has come a long way over the years. Things such as investor-friendly initiatives have been positives. However, there is room for improvement on a number of fronts. Here are ten things I think need addressing for the industry to move forward in the interest of asset owners.
- Fee structures for asset managers
If the stock market goes up 8 percent a year, and an active stock manager regularly returns 7.5%, in what world should that asset manager’s revenue increase by 7.5 percent a year? That is an amazing bottom line reward for failure. Basis point fees on market value of AUM is simply unaligned with client objectives.
- Asset managers as “trusted” advisors
Love them, but they just aren’t. Unless they think it means more profits, and that you can surely trust. The advisor part, not so much. Being in the OCIO business is an asset gathering exercise for them. The final step towards some Terminator-esque “Skynet” – the machines (large asset shops) can do it all: “You mortals simply sit back and relax while we take care of everything.” Let the buyer beware and, if you are using an asset manager as an OCIO, be sure to hire a third party monitor.
- Peer relative returns
Invented by the venerable AG Becker folks in the late 70s, these comparisons should play third fiddle at least at the total fund level. How Michigan’s fund did in 2017 is completely irrelevant to how Florida did. Two different risk tolerances, two different sets of objectives. Noting that you are in the 35th percentile compared to other public funds (corporate, Taft-Hartley, etc.) is an exercise in the tail wagging the dog. The questions you should ask yourself are:
- Did I achieve the desired outcome?
- Did active decision-making add value?
- Are my peers acting differently and why/why not?
- The notion that ESG (environmental, social and governance) factor integration is somehow a political statement
Fiduciaries should consider all relevant factors. The burden of proof is on those that don’t consider these factors relevant, not on those that do.
- Short termism
In investing, manager selection and corporate management. Somewhere along the way, compensation structures were warped into awarding everyone for winning in the next quarter. So, human nature and greed being what it is, this is where most folks are focused. The corollary to this is that those who can think about the long-term, if they survive (big “if”), can win against people who are always looking down at the next step they take.
- The lack of diversity
- Shifting the burden of investment responsibility to individuals and wishing them “good luck”
There are many reasons why defined benefit plans are a shrinking part of the retirement pie. But to hand off our children to a future retirement that depends upon their own acumen, either in investing or selecting someone to help them do so, was just rude. In addition, it is a failed strategy. Then we saddled them with mutual fund fees – OMG.
- Ignoring the fact that a plan’s governance is the most important determinant of success
Brinson, Beebower, et al (always wondered why et al got third billing here) told us about the importance of asset allocation in understanding differences in the degree of long-term success. Yet, the behaviorists have shown that our ability to manage around our biases through good governance practices is really what allows us to make good decisions in asset allocation. How many plans assess their own governance?
- Asset managers passing off/pushing their book as providing “solutions”
The five-part approach to selling a product that isn’t growing assets:
- Hire an academic to “prove” that it makes for whiter teeth and fresher breath.
- Distribute paper with an enticing headline (preferably declaring the toothpaste an asset class or a “solution”).
- Pay to attend conferences and speak on the topic in panels alongside asset owners who “drank that Kool-Aid” quickly.
- Provide outsize incentives to sales team to blanket the world.
- Get contracts ready. See “trusted” above.
- End the active/passive debate
Yes, Virginia, you can win with active management, but it is hard and many cannot. Sometimes it is close to impossible. Some places are harder than others are. No one is right, no one is wrong, everyone is right, and everyone is wrong. As a wise man once said: it isn’t so much if it can be done, it is can YOU do it?
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