Retiring after 45 years in the institutional investment business has allowed me the opportunity to step back and reexamine the industry from a different perspective. This resulted in my list of the top 10 things that need to be addressed in the investment industry:
- Fee structures for asset managers: If the stock market goes up an average of 8% per year, and an active manager regularly returns 7.5%, in what world should that asset manager's revenue increase by 7.5% with no related increase in expense? Managers should only be rewarded for excess return over agreed-upon benchmarks. And the split of a success fee (or performance fee) should be fair — many are ridiculous (check out who owns the yachts). Managers should provide some assessment of value for money, as is required in the U.K.
- Asset managers as trusted advisers: Love 'em, but they just aren't. Being in the OCIO business is just another asset-gathering exercise for them. Let the buyer beware and, if you are using an asset manager as an OCIO, please hire a third-party monitor.
- Peer-relative returns: Created by the venerable A.G. Becker & Co. folks 50 years ago, these comparisons should play third fiddle at the total fund level. How Michigan's fund does is completely irrelevant to Florida's results. Two different risk tolerances, two different sets of objectives. Noting you are in the 35th percentile compared to other public/corporate/Taft-Hartley/foundation funds is an exercise in the tail wagging the dog.
- The notion that sustainability is somehow a political statement: Fiduciaries should consider all relevant factors. The burden of proof is on those who don't consider sustainability relevant, not on those who do. For heaven's sake, just look up the word!
- Short-termism: In investing, manager selection and corporate management. Somewhere along the way, compensation structures were warped into awarding folks for winning now. So, human nature and greed being what it is, that is where most are focused.
- The lack of diversity in the industry: No more need be said.
- Shifting the burden of investment responsibility to individuals and wishing them "good luck": There are a bunch of 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 to do so was just plain rude. It is a failed strategy. Add on top of that we saddle them with mutual fund fees. OMG.
- Ignoring that a plan's governance is the most important determinant of success: Gary P. Brinson, Gilbert L. Beebower et al. told us decades ago 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 and everything else. How many plans assess their own governance practices?
- Asset managers pushing their book as providing "solutions": Sorry, but a customized product isn't a solution, it's a customized product. If you sell it more than once, and they all do, then it isn't even customized.
- End the active/passive debate: Yes, Virginia, you can win with active management. It is difficult and often costly. Many can't win. Sometimes, and for some asset classes, it is next to impossible. No one is right here, and no one is wrong. A wise man once said: It isn't so much if it can be done, it is can YOU do it. See No. 8. And see No. 7: individuals picking mutual funds with high fees on top of other costs simply cannot win ever.
Timothy R. Barron
Mr. Barron is former chief investment officer of Segal Marco Advisors. Mr. Barron's other past roles include president and CEO of RogersCasey; head of public funds and Taft-Hartley marketing and client service at Morgan Stanley Investment Management; senior vice president and senior consultant at Rogers, Casey & Barksdale; senior consultant at Watson Wyatt Asset Services; and chief investment officer at the Virginia Retirement System and executive director of the Richmond Retirement System.
