A recent BoardIQ article demonstrates, in my view, the perverse way in which trustees are encouraged to think about an investment adviser’s business.
Various industry insiders interviewed regarding the economics of low-fee funds recommended that trustees focus not on whether shareholders have the best deal possible, but whether a fund’s fees are actually high enough to permit the adviser to sufficiently profit, despite that advisers effectively set their own prices (yes, notwithstanding the annual 15(c) incantation, few boards exercise affirmative price-setting discretion). One insider says trustees should gain “a broader understanding of the economics of the overall enterprise”—i.e., the adviser’s business—and ask questions like “help me place the fund in the broader context of the broader organization” and how is “zero-fee mutual fund . . . a viable offering?” Another says trustees should “dig a little bit into why [a fund is] inexpensive and what the plan is for the long-term viability.”
What odd propositions! Advisers have their own shareholders, boards of directors, senior executives, product gurus, and FP&A departments (i.e., a lot of people) singularly focused on maximizing profit. And they do an excellent job: asset managers, though tempered in recent years, continue to boast among the highest profit margins in the economy. Why would trustees, of all people, expend their limited resources to “dig” in on whether advisers are making enough money from the fees they set themselves? Do you “dig” in on your cable provider to ensure that your rate is high enough for the company to provide the services it promises? Do you “dig” in on your commercial landlord to make sure that your rent is high enough to support building services? Of course not, because there are no parallels in the actual arm’s-length business world to the strange “arm’s-length” relationship that the industry wants trustees to embrace.
Trustees should be driving hard bargains with advisers, especially in low-fee funds where competition is strong and replacements are numerous. Their hesitancy to do so appears to stem from a misconception that trustees are actually “in business” with the advisers that they are supposed to hire and oversee at arm’s length. So long as this viewpoint persists, fees will continue to decline only despite of (and not because of) the supervision of trustees.
