Advisers want skin in game, but many don't screen for it

Jun 19, 2011 @ 12:01 am

By Jessica Toonkel

Cern Basher won't even consider mutual funds if the portfolio managers don't have their own money invested in them, and he doesn't want to see merely a few hundred dollars in there.

“The bigger, the better,” said Mr. Basher, who is co-founder and chief investment officer at Madison Wealth Management.

Most financial advisers would agree that portfolio manager ownership of the funds that they manage is important. But few use it as a criterion when selecting funds.

In an online survey conducted by InvestmentNews this month, 89.5% of 143 advisers said that it is important that the portfolio managers of the funds in which they invest have their own money in the funds. More than 84% said that they think that it makes a difference in fund performance, which Morningstar Inc. research confirms (see the Investment Insights column on this page).

'NICE TO HAVE'

But many advisers don't screen for funds that the portfolio manager owns when choosing funds.

“It makes us feel good when the manager invests their own money in the fund, but it wouldn't be a reason for us not to buy the fund if they didn't,” said Steve Johnson, an adviser with Raymond James Financial Services Inc.

Malcolm Makin, president of Professional Planning Group, said that he views portfolio manager ownership in the funds that they oversee as “nice to have.”

“I don't think it makes a difference if the portfolio managers invest in their funds or not, but philosophically, one should be willing to take ownership of what you are espousing,” he said. “However, it would not keep us from using the portfolio if we like it.”

Some advisers who take a harder stance on the issue invest in their own portfolios and want to see portfolio managers do the same.

At Madison Wealth Management, for instance, 10% of the firm's $300 million under management is employee and owner assets.

“If the fund manager doesn't have enough conviction to put his own money in his portfolio, that's a deal breaker for us,” said Keith Bonner, a partner at Bonner & Smith LLC, which requires its advisers to invest in the same portfolios as its clients.

Portfolio manager ownership and other factors such as manager tenure and fund expenses are better indicators of how funds will perform than Morningstar's star ratings, he said.

“The star ratings just tell us what the funds have done, and we want to look at factors that will drive performance in the long term,” Mr. Bonner said.

Jason D. Lina, director of research of DCA Global's wealth management segment, said that he has seen firsthand how portfolio managers who invest in the funds that they manage often pay more attention to certain details than those who don't.

“Managers who had their own money in the funds paid more attention and were more mindful of taxes and trading costs,” he said.

But there are still many examples of funds where the manager invests in them but the performance still lags, Mr. Johnson said.

For example, Davis Advisors touts on its website that it has more than $2 billion invested in its portfolios. Nevertheless, the firm's Davis New York Venture Fund and Select American Fund have underperformed their peers for the past one, three and five years, according to Morningstar.

“A lot of the family wealth is in the funds and that hasn't made a difference with the performance,” Mr. Johnson said. “They don't control the markets any more whether they have their own money in their portfolios or not.”

It is true that just because a portfolio manager invests in his own fund doesn't guarantee good performance, but it does soften the blow, Mr. Basher said.

“What it does for me is that it ensures that the manager is thinking long and hard about the investments they are making,” he said.

Some advisers, including Mr. Basher, want managers to make sizable investments in their funds.

“I don't know that there is a right number, but you want more than a token dollar amount invested in the fund,” Mr. Lina said.

Though portfolio manager ownership may be important to advisers, it is rarely an issue for clients.

“I have never had a client bring it up,” said Madeline Noveck, a principal at Novos Planning Associates Inc., who has been an adviser for 26 years.

But with continued market volatility, Mr. Basher and others said that seeing the managers in the funds they oversee is helping them focus on the long term.

“The short-term bumps don't give me quite as much concern if the manager is investing in the fund,” he said.

E-mail Jessica Toonkel at jtoonkel@investmentnews.com.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Sep 13

Conference

Women Adviser Summit - Denver

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

How men and women think differently about philanthropy

Women are more emotionally connected to their gifts, and want to donate time as well, says special projects editor Liz Skinner.

Latest news & opinion

The power of philanthrophy shifts to women, and advisers are taking notice

Philanthropic women are growing in number — and stature.

Cetera brokers may go elsewhere with no stay bonuses on horizon

Some may feel spurned and leave, while others will simply shrug off latest slight and stay.

Fidelity backs away from being 'point in time' fiduciary for 401(k) plans

Some advisers think this indicates other providers will pivot in light of DOL fiduciary rule's death.

Morgan Stanley CEO is happy that brokers are staying put

Firm has seen little attrition since it dumped the broker protocol last fall, Gorman says.

Bills to reform adviser regulation, increase sophisticated investors and protect seniors pass House

Measures included in package of 32 bipartisan bills meant to ease rules, spur investment

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print