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Burton G. Malkiel examines the increases in the asset management fees and demonstrates that they do not appear to affect the economy in any positive way but prove to be a deadweight loss. This conclusion is received from a study that includes the review of theoretical material on the topic and original research.
First, the author demonstrates the process of the asset management fees growth. Malkiel examines the phenomenon of the economy of scale and demonstrates that it is indeed very characteristic in most cases of asset management (with a debatable exception of small-cap funds due to the related difficulties). The author also points out that it mostly produces benefits for the asset managers, even though the individual investors are stated to be able to benefit with the help of the index fund.
Through the analysis of the expenses of the actively managed fund assets, Malkiel shows that the fees expressed in the percentage of assets appear to be low, which is vastly different from their real cost; apart from that, they do not decrease despite the competition (100). These fees, according to Malkiel, have increased for mutual funds, institutional and individual investors, though the rate of increase is different. All these facts account for the growth in the financial services industry.
Malkiel then states that the fees can be justified when the investment provides greater profit than it would unmanaged. Therefore, to find out the extent of the consistency of he fees, the author chooses to compare the return ratios of active and passive funds. The results suggest that most funds (less than one-third) have not survived, which means that the chances of failure in active management are quite high. Apart from that, the results also demonstrate that the increase of fees does, in effect, serve to improve the efficiency of the market (by supporting arbitrage activities), but there is no evidence to demonstrate that the market is not efficient without them.
The efficiency, in this case, according to Malkiel, can be demonstrated by the surviving funds: the managed funds have greater chances of success in the non-efficient market. According to Malkiel, this has never been the case with the market. The conclusion of the author is that, despite the potential to increase the market efficiency, higher fees do not necessarily lead to this result. In the light of the growth of the fees charged by the funds managers, Malkiel doubts the value of the potential (104-105).
These facts make the author to wonder why the excessive fees are not eliminated yet. His suggestions of the explanation include the bias of the customer (who may grow to believe that the higher fee and, possibly, a brand means better quality), the widely spread and advertised idea of the difficulties of investing, and the overconfidence of the investor (who believes that they are capable of finding the best manager).
Malkiel also points out that, while sophisticated and experienced investors may also make the mistake of an excessive fee for the manager, they are also likely to negotiate the price, which proves the authors point of the lack of the fees growth necessity. Apart from that, Malkiel admits that the investment managers are useful for the rapid dispersion of information, but even so, the author insists that the number of active asset managers is excessive. To conclude, the author suggests that investors consider the actual, adjusted fees of the managers, not the asset percentage.
Works Cited
Malkiel, Burton G. Asset Management Fees and The Growth Of Finance. Journal of Economic Perspectives 27.2 (2013): 97-108. American Economic Association. Web.
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