When asset management fees are worth it

If you’ve been following the US economics and finance blogosphere, you will have realised how financial adviser fees, especially the fees of hedge fund managers have come in for criticism for being excessive.

To make matters worse, the performance of these high fee charging asset managers has been poor compared to benchmarks such as the S&P 500 as shown in the chart below.

hedge

People are justifiably angry. It’s very annoying to put your hard-earned money in a fund that is barely growing while your fund manager keeps inventing different charges to deplete your already stagnant account. But it is important that we do not turn a problem with hedge funds (which serves extremely wealthy customers anyway) into a general dislike for all financial fees and I’ll explain why.

If you manage your own investment portfolio you will realise that there is a psychological difficulty in separating your investment funds from your funds available to meet expenses. This makes it more difficult to meet specific savings targets such as saving for tuition or children’s school fees or whatever. But if you are to put those funds into a mutual fund, an investment scheme such as an annuity, or a pensions plan you will find it easier to mentally segregate those funds from your funds available for use.

In this age of free information, one can see that some of the investment strategies of these funds are not exactly complicated. In Ghana, the high yield of government securities is especially sort after, with some funds consisting solely of a mix of 91-day, 182-day and 1 year government debt. One will wonder why they should have to pay management fees for that. But these fund managers are actively re-balancing the mix of these securities to ensure alpha, or a return above what simply buying and holding those securities will return. Even the financially literate may not find the time from their normal work schedules to keep re-balancing their portfolio by making constant trips to their bankers.

But let me not stress the second point because there may be a case in which the management fees equal or surpasses the extra returns generated. The first point is sufficient. For many people the alternative to funds managed by another party is funds not saved at all. Having your funds out of your immediate reach provides you with a little less incentive to go withdraw it for a purpose other than it was meant for. And if that keeps you on track with your financial goals then it is worth paying fees for.

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Jerome Kuseh

Accountant | Economist-in-Training | Private Investor
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