Sunday, April 16, 2006


Money Manager Compensation


Sir Francis Bacon said it all when he declared "knowledge is power". The more we know, the better equipped we are to make good decisions. This is why I am such a big advocate of better disclosure when it comes to all things financial (See the April 11, 2006 posting entitled "Practice What You Preach".)

So it was with great delight that I read Gretchen Morgenson's New York Times article this morning, in which she describes the opaque nature of fund manager compensation. Her point is a good one. The absence of information is made more acute by the fact that most of the large fund companies are private and therefore outside the reach of statutory requirements to tell all. Pulitzer Prize winner Morgenson references a recent letter from investment legend John C. Bogle. He writes about the urgent need to require mutual funds "to disclose the aggregate dollar amount of direct and indirect compensation paid to the five highest-paid executives of their manager and distributor".

Why is compensation disclosure important?

A lot of money is at stake. Managed funds are an integral part of the retirement planning process. According to the Investment Company Institute, retirement assets invested in mutual funds in 2004 approximated $3.07 trillion, with $1.6 trillion finding a home in defined contribution plans. Anything that impacts performance necessarily affects the financial security of employees and retirees. This includes fees which should reflect, among other things, the costs of operating a fund. How and why an individual manager is compensated speaks volumes about the expected return pattern of a particular fund. (Some of the other factors that determine returns include strategy, portfolio mix, risk management procedures, internal controls and market conditions.)

When actual returns deviate from forecasted returns (and initial asset selections have been made on the basis of expectations), an investor may find herself in the unhappy situation of not having enough money to satisfy an objective. Individual or institution, the end result is a funding gap in need of a solution.

John C. Bogle is not alone in asking questions about manager compensation. In May 2005, the U.S. Department of Labor and SEC published Selecting and Monitoring Pension Consultants - Tips for Plan Fiduciaries.

A broad and important topic, manager compensation and the relationship with pension consultants, is left for another day...
posted by Susan Mangiero at 4/16/2006 03:23:00 PM