Money Managers (And Advisors) Should Be Made To Eat Their Own Cooking

According to Jeff Rosenberger, PhD, director of research at Wealthfront a recent study by research firm Morningstar Inc. found that just 40% of mutual fund managers were doing with their own money what they want you to do with yours: invest in their funds. After the report came out, the digital ink flowed on the question of whether mutual fund managers should “eat their own cooking.”

I don’t think there’s much doubt about it. Except in a few well-thought-out cases, money managers should be required by their companies to invest in their own products. I’d go one step further and say that financial advisors ought to have money in the same products they recommend to you.

For years, the savviest investors, top tier endowment managers and the best financial advisors, have been putting money managers to the test, asking: “Do you invest in your own products?”

Then they sit back and wait for the answer, probing further if they need to. David Swensen, the well-regarded CIO for Yale University and author of Unconventional Success, highlights co-investment as one of the characteristics of the best money managers. Some money management firms outline their approach to co-investment directly in their marketing materials. For example, Vulcan Value Partners requires that its products serve as the exclusive public equity investment vehicles for all their employees and the firm “ask(s) no investor to invest where we do not invest ourselves.”

(I’d expect some reasonable exceptions to these kinds of rules, such as for managers whose funds have extremely high minimums, employees who are not qualified investors and therefore should be restricted from private partnership funds, and the 401(k) funds of employees’ spouses.)

The next logical step is to extend this kind of eat-your-own cooking thinking to the advisory world….

Read more at https://www.wealthfront.com/blog/money-managers-advisors-eat-cooking/