Daniel Brocklebank, UK director of Orbis Investments, warned the audience at the 72nd CFA Institute Annual Conference: Bad incentives lead to bad results, particularly when it comes to investment management.
With that in mind, Brocklebank suggested that it was worth considering incentives, especially since they affect asset manager behaviour. According to him, while management fees based on assets under management (AUM) are convenient for many reasons, they do often create problems as incentives. However, finding a suitable replacement for AUM-based fees poses its own challenges that lead to what he called the cobra effect (occurring when an attempted solution to a problem makes the problem worse). According to Brocklebank, there is no one-size-fits-all approach to investment management fees. Therefore, a complete set of tools and an awareness of their limitations is needed to influence investment manager behaviour.
The full article is available on the CFA Institute blog.