Fund Managers Should "Eat Their Own Cooking" - Think Tank

Stephen Little

28 August 2013

Investment managers should invest a significant portion of their investible wealth and total remuneration alongside that of their investors, to align their clients' interests with their own and improve risk management and investment performance, according to a new report by London and Paris-based financial services think tank the New City Initiative.

The report, called Les Patrons Mangent Ici, which translates as "the owners eat here", said that better alignment with clients will lead to improved risk management and investment performance, as well as helping to rebuild trust in the financial services industry.

“If the financial services sector is to rehabilitate itself in the eyes of the public, it must reform itself so that decision makers are better aligned with their clients and with the consequences of their decisions," said Daniel Pinto, co-founder and chairman of NCI and chief executive of wealth manager Stanhope Capital.

"Better alignment is the right way to do business from the client’s perspective, and investors are increasingly recognising that fact. Moreover, better alignment not only reduces risks for investors, but also for the financial system as a whole," added Pinto.

NCI believes better alignment can be achieved not by additional regulation on remuneration or ownership, but rather through a process of cultural change supported by policymakers and regulators together with industry stakeholders.

The think tank said it was "essential" for fund managers to invest a significant portion of their investable wealth and remuneration in the same strategies and products as their clients to ensure that they share in the same risks and rewards.

The firm also believes that performance-related remuneration should be assessed over a meaningful timeframe as it is more difficult to sustain good performance over periods of one year, and because performance related pay over short timeframes can encourage managers to take excessive risks to generate a substantial pay-out.

The report suggests that in order to become better aligned with clients, wealth managers must be able to select the best products for their clients, without bias either from rebate arrangements or towards in-house products.

"All too often supposedly independent wealth managers invest a large proportion of their clients’ wealth in in-house products. Even taking into account fee differentials, it is extremely unlikely for any one investment house to have the best or most suitable products across asset classes that together comprise even one quarter of their clients’ portfolios," the report said.

Pinto said that the report will form the basis of discussion between the investment management industry and policymakers, the conclusions from which will be used to establish NCI's code of good practice for the investment management industry.

“Clearly, this is something that will take time to achieve, but the drawing up of such a code, which we intend to become accepted as an industry norm, will be a good way to encourage managers to put the principles we are advocating into practice," said Pinto.