Imagine that your wealth manager recommends an investment into a fund managed by someone you’ve never met and likely never will, someone you’ve only read about, who is partnered with a team of professionals whose names you mostly don’t know.
Further, while you have access to the manager’s track record, you have no clear understanding of how they plan to make money. They hint that their strategy will be somewhat different than previous ones, but won’t offer any details. And in this fund, the management team decides how much of the annual revenues to keep for themselves in the form of compensation, and how much accrues to the benefit of investors. Finally, they also decide how much, if any, of those revenues are paid out to investors in the form of dividends.
Does this sound like the kind of investment pitch that would persuade you to reach for your checkbook? I’m guessing no. Like some others in the investment world, I manage an investment business where the opposite happens — we carefully articulate our strategy, regularly make all of management available to our investors, have a fixed compensation scheme for managers based entirely upon performance, as well as a contractual dividend policy. And even with that, we are carefully scrutinized by prospective investors, and appropriately so. And yet, I am continually amazed at the correspondingly low level of due diligence that happens when people invest in the public securities arena.