When I started in the investment business in the late 1970s, fees of all types were, by today’s standards, almost incomprehensibly high. Upfront sales charges for mutual funds, for example, were as high as 8.5% of the money placed in them. And commissions paid even by institutional investors for trades could exceed 1% of the principal.
Competition from discount brokers like Fidelity offering no-load funds addressed the first issue. The tripling of stocks in the 1980s fixed the second. Managers reasoned that the brokers they were dealing with were neither providing better information nor handling trades with more finesse in 1989 than in 1980, yet the absolute amount of money paid to them for trading had tripled. So buy-side institutions stopped paying a percentage and instead put caps on the absolute amount they would pay for a trade or for access to brokerage research.
All the while, however, management fees as a percentage of assets remained untouched.
That appears about to change, however. The impetus comes from Europe, where fees are unusually high and where active management results have been, as I read them, unusually poor.
The argument is the same one active managers used in the 1980s in the US. Stock markets have tripled from their 2009 lows and are up by 50% from their 2007 highs. All this while investors have been getting the same weak relative performance, only now they’re paying 1.5x- 3x what they used to–simply because the markets have risen.
So let’s pay managers a fixed amount for the dubious services they provide rather than rewarding them for the fact that over time GDP has a tendency to rise, taking corporate profits–and thereby markets–with it.
The European proposal to decouple manager pay from asset size comes on the heels of one to force managers to make public the amount of customer money they use to purchase third-party research by allowing higher-than-normal trading commissions. Most likely, customer outrage will put an end to this widespread practice.
Both changes will doubtless quickly migrate to the US, once they’re adopted elsewhere.