The oil that lubricates the wheels of investment management.
Consider this: Inhabitants of a small community before the wheel was invented carried heavy goods on their backs. Then came the wheel and, from then on, their goods could be efficiently moved on a cart, and not on their backs. As with all economic productivity, cause and effect meant that the village doctor made less money as the epidemic of related back complaints ceased.
Then the competitive spirit of entrepreneurship raised its head and a young man produced an upgraded cart, with a device that worked as a ‘brake’. However, to his surprise, the cart did not sell! Demand was as flat as the ground the village stood on. The new cart was not necessary.
Desperate to recuperate his new investment costs, the young man hired people with the promise of being paid a commission for every cart sold with a brake. Their first task was to convince villagers that they needed a brake and then overcome their objections as to why they would not buy one.
Providers of investment products design first and foremost what they can sell, rather than what investors need. To do this they need an army of salespeople and a distribution network of intermediaries. Lubricating the wheels of this network is a costly business. In an age of digital communication, financial journalists and media pundits are lavishly entertained. All expenses paid, helicopter tours of major cities, firstclass air trips to exotic places, big game safaris in Africa, VIP tickets at Formula One races, to name but a few.
Little wonder management charges are a complicated act of smoke and mirrors deliberately hiding the real costs. In addition to the average management fee of 1% per annum, the investor has to navigate through a head-spinning complexity of additional costs covering entry fees, exit fees, administration charges, transaction costs, market impact costs, stamp duty and performance fees. In fact, a report by the UK regulator into investment industry charges is due to be published in October. Don’t hold your breath, though. A simple transparent all-in fee is what is needed for investors to compare apples with apples but, if past is prologue, this is not what we will get.
Why should investors pay the investment company’s cost of marketing designed to enhance its own profitability? The more we keep in our pockets as investors the more we make. Investment companies should throw less money at entertaining journalists and intermediaries and give it back to the investor. For most of us, a cart without a brake will do just fine!
Jeremy Blatch TEP
This article was also published in the print edition of the Sur in English