WE all hate fees. A cursory look at any bank account statement or prospectus is enough to make even the most reasonable customers cringe. However, like most things in life we need some perspective or context. What service are you receiving in exchange for the fee? How valuable is the service and more importantly, if you were to forego this service, what is the impact on your financial well-being? Let’s take a look at fees in the context of the investment management environment.

We must start by re-defining the way we assess fees. A fee is high if you cannot derive sufficient value from the investment manager to offset the fees. In this scenario, your net returns (after fees) are too low. Alternatively, a fee is low if you can derive significant value from what the investment manager is offering, net of the fees. Absolute numbers and figures cannot be used to assess whether a fee is “high” or “low”. Investors may also wish to compare fees between different investment managers or banks. This comparison can also help an investor to determine whether a particular fee is “high” or “low”. However, it is very important to ensure that the quality of service and the value delivered by each investment manager is also comparable. For example, one would not want to compare the fees of a bad lawyer (with a poor track record for winning cases) and the fees of a very good lawyer (with strong track record and reputation). Similarly, one must compare investment managers with similar value propositions, expertise and track record.

Investment managers and banks alike must charge fees for the services they render. As an investor, you are responsible for clearly understanding how this fee impacts your return and what value you derive from the investment manager. One must determine if the value created by the service provider is sufficient to offset the fees.

In the USA, it is a standard practice for independent fund managers to charge a “management” fee based on the value of assets under management as well as a “performance fee” which is only paid if a specific “target” rate of return is achieved. This structure is pervasive across developed markets and ensures that the incentives of the investment manager and investors are clearly aligned. The investment manager only makes money after the investors make money. The management fee serves to offset the administrative costs incurred by the investment manager. Investors must consider the “effective fee” (that is, the combined effect of all fees levied by the manager) when assessing a particular investment product. Again, this fee must be assessed in the context of the value that the investment manager can create for you. For example, if an investment manager has a strong track record of delivering attractive returns (net of fees) and is providing you with a hedge to devaluation and inflation, then an investor may be less concerned about the fees charged by the manager. However, during times of poor performance, the investor becomes very concerned with the fees charged by the investment manager and rightly so. As a result of this dynamic relationship, investors must ensure that the investment manager is sufficiently incentivised to preserve the interest of the investors in times of both good and poor performance. Investment Managers with strong track records over time and performance fees in line with the industry average are usually good places to start looking.

In Jamaica, there are few very independent fund managers and the investment managers associated with large financial institutions tend to charge flat fees regardless of performance. Additionally, investment managers that are affiliated with these institutions are faced with a potentially large conflict of interest as they may face pressure to invest in risky corporate banking projects or on-sell undesirable assets from their balance sheet to their customers or discretionary portfolios.

All too often, investors miss out on solid and valuable investment opportunities because they are too focused on the management fees. If the investment manager is providing you with value that you could not have created for yourself, or obtained elsewhere, then the logical thing to do is pay the fee for the service rendered. Just like having a good lawyer in times of trouble, having a good investment manager is priceless.

Marian Ross is a business development officer at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm