The following is an excerpt from our Q1 2017 Commentary and Review
In a recent CNBC interview, Warren Buffett made mention of the fact that investors were overpaying for advice. The thrust of his position was that investors were paying high fees, which penalized their portfolio, effectively preventing them from reaching their goals. His focus was on mutual fund fees and fees paid to hedge funds that were as high as 2% of assets plus a performance bonus of 20% for returns above a certain threshold. Being in the business of providing investment advice, these comments hit home from a couple of perspectives. On the one hand, I agree that mutual fund fees are too high. Investors with at least $100,000 in assets should probably graduate to separately managed accounts with transparent fees that scale down based on the size of the individual’s portfolio.
Secondly his comments on the fees associated with hedge funds were spot on. Investors who invest in hedge funds with a 2 and 20 fee schedule are grievously overpaying. The performance bonus alone provides significant advantages to the fund manager with virtually zero benefit to the unitholders. In fact, you could argue – which I have done in the past – that performance fees are a net negative to investors because they lead to risk taking that is rarely in the investor’s best interest. I think of the over-weighted losing position that Pershing Square Hedge Fund manager Bill Ackman took in Valeant Pharmaceuticals as a case in point.