Are You Paying Too Much?
Has all of this brought fees to where they should be? It depends on who you talk to. Pension funds and many investment consultants tend to say they’re inflated, especially for active management. “Generally, fees are too high in the industry,” says Rabovsky.
The Ontario fund investments director notes, however, that good fees are out there to be found—but you have to look for them. “You do occasionally find a high-quality investment management company that has a demonstrated track record of excellent performance that doesn’t charge too much.”
Peter Lindley, president and head of investments at State Street Global Advisors, Ltd., says fees are where they should be due to competition. “If they were too high, someone would be able to come in and lower the fees and still be effective and profitable,” he explains.
Yet, he adds, investors today are more discerning about what they spend money on. “They want to get away from paying for general market exposure with high fees, and they want to pay for pure alpha, which is not just a market exposure.”
But getting pure alpha isn’t easy. “Too much of the fees are being paid simply for market exposure and not enough for skill,” says Rabovsky. “If you look at the dispersion of [returns] for private equity managers and hedge fund managers, they can be huge. You can be talking about 5%, 10%, 20%, depending on where you are in the market cycle. So not everybody should command a premium price.”
Lindley acknowledges the dispersion of results among active managers. “The idea that some active managers [offer] nothing more than a particular style of investing or maybe a beta exposure is quite well documented,” he admits.
And having a manager underperform the market for two, three or four consecutive years is typical, says de Bever. “After fees, even your good managers will have bad years,” he adds.
Don’t Cut Off Your Nose
So what should investors do? First, consider net-of-fee returns over time and judge managers based on whether they can meet an investor’s return goals, says Kaufman. Don’t disregard a product simply because it costs a lot, he adds.
“People who decry high fees forget to look at the other side of the ledger, which is, are you able to achieve the returns you want without paying higher fees and without paying performance fees?” Kaufman says. “Can you imagine if you put out tenders to build a building and the lowest-cost tender automatically won without looking at their experience?”
The investor that only goes for low fees is “willing to cut off his nose to spite his face [and] lower net-of-fee returns just to save on fees,” Kaufman adds. It also helps when managers have skin in the game. “You want them to be happy when you’re happy; you want them in pain when you’re in pain,” says Rabovsky.
One way to do that is to seek structures where fees are reduced or returned after periods of underperformance, says the Ontario pension fund investments director. But, he adds, those are rare.
And investors should remember that historically good returns are not a good indicator of future returns, notes Lindley. “You have to be careful about what managers who charge high fees are actually going to deliver,” he says.
Ultimately, navigating the world of fees boils down to one thing: having realistic expectations about net results.
Yaldaz Sadakova is assoiciate editor of Benefits Canada.
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