Should fund managers be paid less for poor performance?

Sarah Smart of the Pensions Trust is on a crusade to make the fund management industry more accountable. She suggests in this month’s IPE that the bonus structures for those managing your money should be aligned with the time schemes you invest over. That would stop short-termism where they make a quick buck and you pick up the tab later.

The counter-argument is that smaller firms of asset managers would not be able to live with the uncertainty about getting (fully) paid and  that it would distort fund manager behaviour . I  I don’t get either argument, if behaviour is distorted, then is should be distorted in the right direction, if fund managers aren’t putting their money where their mouth is, then they are not in the real world. No one has a right to a risk-free livelihood.

Here is my tuppence worth.

There is much that a fund manager can do to get it right; they can set a strategy, communicate it to clients and deliver to it. If tactical decisions are taken along the way (and properly explained) then fine, but if a manager says one thing and does another they should not be paid. I wouldn’t pay a builder who put in a tennis court when I asked for a swimming pool. Not sticking to the brief (managing around the benchmark) is punishable by non-payment in the same way as not completing a job on time will result in retentions. That’s real world- at least outside the fund management industry

Secondly, shoddy workmanship needs to be put right. Many fund managers pay little attention to how the fund is managed at an operational level. Consequently funds can be ripped off as State Street ripped off The Royal Mail and Sainsburys by charging twice for the same job. Similarly, poor controls  can mean that the brokers and the traders can see your stock purchasing and selling coming- resulting in them trading ahead of you, drying up the market liquidity and forcing managers to buy higher than they should do and sell lower.

These terms are relative- buying higher, selling lower than what you might ask. The trouble is there is no benchmark for what is reasonable and consequently manager performance is neither measured or rewarded or punished against good or bad execution.

I am sure that there are other areas of fund management that are simple to measure, but “sticking to the brief” and “doing a good job” are the kind of phrases that most people can understand.

When the Chairman of IGCs and Mastertrusts report to their members on how a fund manager has done , these are the kind of things I expect to read with a proper assesment on whether the managers have done what they’ve said they would and done a good job.

There are of course other questions, whether the stocks picked were well chosen, whether the tactical changes in the fund were sensible and whether the fund remains suitable for the purpose it is employed for. Most of these questions are fundamental and come down to an assesement of the structure of the fund , the processes and the people. Frankly, the core element of a fee to a fund manager is based on an assesment of whether what you are buying is value for money and these aspects are rewarded either by retention or dismissal.

So I’d make a distinction in terms of rewarding fund managers. I wold retain a portion of a fee in an escrow account and pay it only on delivery of the goods. I would retain the right to fire a manager if the manager is neither suitable or competent and I’d make it absolutely clear to the manager how all this worked.

So far, performance fees have fallen down because the hurdles through which managers have been set, have been created by the managers themselves.

In future (and this will start in 2015 and ratchet up as the impact of the measures in the DWP’s Command Paper are realised, the measures savers require of their managers will be determined by Government for Governors (trustees and IGCs).

No doubt there will be some readers who will be throwing up their hands in despair at my acceptance of more Government intervention into what should be a free market. I can only say that a transparent market where everything is out in the open,needs less regulation. The IMA and the ABI have yet to come good on their promises of a transparent market and we seem no nearer understanding the transaction costs of most insured funds than we were this time last year when the ABI promised us full disclosure by mid 2014.

Sarah Smart is right to demand alignment of fund managers bonsues with delivery over the timescales of the Pensions Trust. My article is building on this to focus on areas where performance fees can be charged.

In practice, managing performance is cheaper than hiring and firing and I think it is the way to go.

In conjunction with tough and effective governance by the IGCs and  trust boards, I see the fund manager becoming more accountable and having to work a great deal harder for the high amounts of money he or she earns. There can be no space for passengers in the engine rooms of modern day schemes.

In answer to the question posed in the title, fund managers should be paid like anyone else, on performance, and scrutiny on performance is exactly what could governance delivers.

 

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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