Do You Know What You're Paying in Fees?
A Dutch pension fund now demands full disclosure of fees from the investment managers it hires:
Disclosing fees isn't hard, but it can be risky for some managers. Simply put, they charge an arm and a leg and don't really want their customers knowing that. So they continually emphasize that all the customer should care about is how much the manager makes for them. The argument's worked for years. But it may - let's hope - finally be wearing thin.
In a low interest rate environment, returns in many asset classes have been compressed. Clients who ignored fees can't afford to do so anymore. And in the case of a pension fund, which serves as a fiduciary for those receiving pension payouts, ignoring fees could be deemed a breach of their fiduciary duty. In fact, one wonders why they've not been held accountable in the past, having paid out hundreds of millions in fees to managers, some of whom provided rather meager returns, most of whom are controlled by principals whose compensation ranges from hundreds of thousands to millions to, in some cases, tens of millions of dollars, all garnered from the fees they charge pension funds whose recipients likely make tens of thousands of dollars per year.
Private equity firms would fall into the category of highest compensated. But perhaps the worm is in the process of turning here - at least at this Dutch fund.
Being in the position of disclosing fees in the most transparent manner possible, I can attest to the fact that from time to time customers will bring up the subject of compensation. But if what you charge is fair, if it reflects the value you bring to the table, it's not going to be a terribly difficult exchange between you and your customer. On the other hand, if you're making millions while providing returns that don't beat some agreed-upon standard, you have to believe the conversation might get a bit dicey. Of course, I wouldn't know, being for years in the habit of both charging a fair price and disclosing that price. (You can pat me on the back now.)
A Dutch pension fund running €186.6 billion ($204 billion) is to cease investing in outside money managers, including private-equity firms, that don’t fully disclose their fees, a move that echoes concerns raised by a host of U.S. investors.Notice the "concerns" of U.S. investors, which include pension funds. Have these concerned investors taken the step the Dutch fund has already taken? If not, one has to wonder why. In fact, if my pension were paid by such a fund, and they did not receive full disclosure, such would likely cause great consternation.
Disclosing fees isn't hard, but it can be risky for some managers. Simply put, they charge an arm and a leg and don't really want their customers knowing that. So they continually emphasize that all the customer should care about is how much the manager makes for them. The argument's worked for years. But it may - let's hope - finally be wearing thin.
In a low interest rate environment, returns in many asset classes have been compressed. Clients who ignored fees can't afford to do so anymore. And in the case of a pension fund, which serves as a fiduciary for those receiving pension payouts, ignoring fees could be deemed a breach of their fiduciary duty. In fact, one wonders why they've not been held accountable in the past, having paid out hundreds of millions in fees to managers, some of whom provided rather meager returns, most of whom are controlled by principals whose compensation ranges from hundreds of thousands to millions to, in some cases, tens of millions of dollars, all garnered from the fees they charge pension funds whose recipients likely make tens of thousands of dollars per year.
Private equity firms would fall into the category of highest compensated. But perhaps the worm is in the process of turning here - at least at this Dutch fund.
In private equity, the pension fund has started to invest directly in takeovers, such as the €3.7 billion purchase of car leasing company LeasePlan Corporation NV in July. It is also backing the creation of new private-equity firms in exchange for better terms on fees.If you use an advisor or advisors to manage your investments, feel free to request - and if necessary demand - a full accounting of the fees they charge. In fact, you should already know how to check on those fees, especially if they are deducted from your account, a common practice. The fee should be clearly listed on your statements.
Being in the position of disclosing fees in the most transparent manner possible, I can attest to the fact that from time to time customers will bring up the subject of compensation. But if what you charge is fair, if it reflects the value you bring to the table, it's not going to be a terribly difficult exchange between you and your customer. On the other hand, if you're making millions while providing returns that don't beat some agreed-upon standard, you have to believe the conversation might get a bit dicey. Of course, I wouldn't know, being for years in the habit of both charging a fair price and disclosing that price. (You can pat me on the back now.)
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