It’s time to end guaranteed compensation for mutual fund managers

By Money Matters Editors

One long-standing investment community practice in need of revision is the management fee, particularly among mutual funds.

The practice of financial managers charging a 1.0 percent of even a 0.7 percent management fee - exclusive of performance – has to end.

The reason? The fee simply amounts to guaranteed pay, regardless of performance. With the fee, if a mutual fund does well, the management team collects a fee; if the fund does horribly, the team collects a fee, usually with comments asserting that ‘the fund would have performed better during the year, but market conditions were against us.’ Where’s the incentive for stellar performance under that system? Little exists.