MANAGEMENT FEES

MANAGEMENT FEES

MANAGEMENT FEES

MANAGEMENT FEES

Management fees are easily judged. Given the riskiness of the assetsbeing managed, did the realized rate of return exceed the rate onrandomly selected portfolios of equal riskiness by an amount less than,equal to, or greater than the management fee? This simple measurement is enough unless there are nonpecuniary advantages or disadvantages attached to the management of one's own investments.

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Some investors are undoubtedly willing to pay someone in orderto be relieved of the possible agony of managing one's own investments, and others will require an extra margin of superiority for theinvestment advisor because the investor has been deprived of the funof playing the investment game. Perhaps of greater importance arethe political implications for some investors of the divestiture of directresponsibility for investments. Many corporations, for example, findthat their dealings with labor unions are simplified if responsibilityfor managing the employee pension fund is in other hands, particularlylarge institutions of impeccable reputation.

there are manyfine investment counselling firms, and their staffsare honorable, conscientious, and sophisticated. Yet, most of their resources are devoted to security analysis and to portfolio management rather than to investment counselling. Investment counselling is advising an investor regarding investment policy. Portfolio managementis the execution of policy. Security analysis provides some of the information traditionally considered necessary for portfolio management.

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Those who have found the evidence regarding the efficiency of markets convincing, as have the authors of this book, will believe thatthe most important investment decisionthe one with the greatestimpact on resultsis the choice of policy with respect to risk. Ratesof return of mutual funds, for example, vary consistently and substantially almost entirely because of differences in risk. There is no substan-tal evidence (some would say no evidence) that the managers ofany mutual fund consistently display superior judgment in pickingassets of a given degree of risk.

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