Unlocking Real Value Blog

Stop Putting the Squeeze on Investors

There was an interesting article in the WSJ recently – Hey, Money Managers, Stop Putting the Squeeze on Investors – focusing on how while the stock market overall has done poorly over the past decade, the net margins of the 10 major publicly traded fund managment companies is still running at an astonishing 25.5%.

The author suggests that unless some changes are made, many investors may abandon the markets like they did in the 1930s and 1970s. He suggests that top money managers consider 1) cutting fees (only 175 out of 6,732 mutual funds have cut their fees so far in 2010 and only by an average of 0.07%; 2) help slash tax bills by investing more tax efficiently; 3) close when they get too big; 4) leave the herd mentally behind; and 5) be more upfront about not only how they performed, but how investors would have done had they done nothing – in other words – did the money manager really add value?

There are some important points here for investors and advisors. Fees should always be a consideration when investing and it is fair to question whether a particular manager, fund or fund family has reduced their fees. While there may be a legitimate reason why fees are where they are, it is incumbent upon the investor and advisor to determine those reasons. Part of the intial investment decision should take taxes into account – any advisor that has not done this is not doing clients any favors. Investors who invest on their own need to be aware of taxes – or perhaps they should consider getting some advice.

As managers or funds get larger, especially if they are investing in anything other than large-cap stocks, they should consider closing. Many managers and funds have closed in the past. In conducting due diligence, the question of when and if the manager or fund will close is definitely important. While the answer to one of these questions might not change your investment decision, taken as a whole, these questions, if answered in a way that does not add comfort, should make you think twice before making an investment.

One value of having an advisor or firm that conducts due diligence is to find a manager or fund that does not follow the herd, especially if it impacts their turnover as discussed in this article. Finally, managers and funds and their performance should be evaluated in multiple ways and no one should rely only on the manager or fund to tell you how they did.

The article raises valid points from a number of perspectives. Investment managers and fund companies should evaluate their policies in all of these areas and provide answers – not only when asked, but proactively. Advisors should outline their criteria for making investments to their clients, and all of these points are important ones to include. And investors should either develop their own due diligence methodologies to address these issues, or seriously consider working with an expert who can!

Leave a Reply