Why are Money Managers Paid so Much?
Cullen Roche – 03/20/2018
“I really liked this article by Noah Smith at Bloomberg about why money managers get paid so much. The conclusion was basically: we don’t fully know why asset managers get paid so much and whether they get paid too much. I’ve spent A LOT of time thinking about this so I figured I might be able to shed some light on the issue.
My opinion is that asset managers generally get paid way too much. For instance, the average investment advisory fee is still close to 1%.¹ And the average equity mutual fund’s asset weighted expense ratio is 0.63% while the average index equity mutual fund costs 0.09%.² In other words, if you work with an investment advisor who uses active equity mutual funds you are paying about 1.6% per year and about 1.09% if the advisor uses index funds. For an investor with $1,000,000 this is the equivalent of dropping off a suitcase at your advisor’s office filled with $16,000 or $10,900 every single year. That’s an ungodly amount of money to pay someone just for managing your assets and it can have a devastating impact on your total returns. I doubt you pay your accountant, doctor, personal trainer or anyone else that much money in annual fees. So how do asset managers pull this off?”
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