Active fund management leaves investor’s seeking better alternatives. This is not a surprise to me.
Recently the European Securities and Market Authority published an article examining the fees charged by actively managed investment funds.
Bottom line, the report found that active managers did not outperform their benchmarks during market stress. Of course, this is not the message delivered by the mutual fund industry.
To be sure, the mutual fund industry will continue to claim active management is the investor’s best friend. This could not be farther from the truth. Indeed, the real “devil” is how mutual funds charge fees.
As an investor, ask yourself this question:
If you had a choice between a fixed fee or % of assets fee, which would you choose?
As a bank, ask the same question:
If you had a choice between a fixed fee or % of assets, which would a bank choose?
The answer becomes obvious when examined from two different points of view. Clearly, the bank will choose the highest fee model, % of assets. Unfortunately, investor’s have not been taking advantage of the fixed fee model. The fixed fee model is not a mainstream idea, yet.
The problem is most financial advisor’s are employed by a financial institution. As a result, the financial institution chooses the fee model that suits their needs, not yours. Even worse, advisor’s are facing two challenges: 1) extraordinary high compliance fees (among many other fees) and 2) a duty of loyalty to their employer.
Conclusion
In the end, the financial industry’s fee model is designed to maximize corporate profits. Certainly it is not in the investor’s best interest. In my opinion, both investors and financial advisors need to reexamine how they charge and pay fees. A fixed fee model, like how lawyers and accountants operate, is long over due in the financial services industry. Active fund management leaves investor’s seeking better alternatives.
Maybe it’s time for a change.
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