Asset Managers Must Put Investors First

Bigger funds and higher fees equal greater profits for asset managers, but these measures can be harmful to performance delivered to investors

Christopher J. Traulsen, CFA 12 December, 2013 | 9:51AM
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Both asset managers and advisers in the UK and Europe are facing a spate of new regulations that dramatically affect their businesses. Setting money markets aside, two of the more notable are RDR and the proposal for a cap on pension fees. At the European level, we’ve also seen proposed regulation of fund manager bonuses.

In these cases, the regulator is effectively saying that the market is not functioning properly. In the UK, in the case of RDR, it became clear that the lack of any link between adviser compensation and the level of service they provided for investors, and the skewed incentive that resulted from being paid commission determined by the fund company, were unsustainable. In the case of pension fees, the focus is on the apparent lack of meaningful price competition and the opacity of fee disclosure. 

Both regulations present a classic principal-agent problem. Regulation is not always the answer, but if the industry fails to adequately police itself, then it may become the only viable answer.

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About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.