With the markets serving up nothing but lemons, it is high time Wall Street started helping investors make lemonade.
Stocks have gone nowhere for a decade, bond yields are near record lows, and you couldn't find the return on your money-market fund if you put it under an electron microscope. But the 10 major publicly traded fund-management companies had a combined $21 billion in revenue last year. Their net margins -- the percentage of every dollar they take in that turns into pure profit -- still are running at up to 25.5%, a rate most businesses could reach only in their dreams.
Here are a few suggestions.
Cut fees
When returns shrivel, high fees hurt so badly that just about every investor feels the pinch. Roughly 175 out of 6,732 mutual funds have cut their fees so far in 2010, by an average of 0.07 percentage point, according to the researchers at Morningstar.Not much, but it is a start.
Slash tax bills
Much of the money-management industry still invests as if taxes were irrelevant to net returns. That is unacceptable. Every fund or investment strategy should be clearly designated as appropriate or not for taxable accounts and then managed accordingly.In the long run, taxes -- generated mainly by realized capital gains -- have reduced fund investors' net returns by roughly 2 percentage points annually. Tax-wise management can close that gap.
If mutual-fund managers, financial planners and stockbrokers made a more-regular practice of investing alongside their clients, they would feel the same pain of paying unnecessary taxes -- and quickly learn the importance of minimizing those liabilities.
Perhaps the most important question investors should ask any financial professional is "How do you invest your own money?"
Set limits
A new study sponsored by the Rotman International Centre for Pension Management in Toronto finds that, even among pension funds with access to the world's best money managers, the smallest funds earn the biggest returns.Yet very few investment companies close funds (or stop taking new money) when they are in danger of growing too large to be effective. Closing would reduce the rate at which their management fees could rise. But when performance suffers and investors' enthusiasm fades, fee income falls anyway. Fund companies should automatically close fast-growing funds in less-liquid markets like small stocks, hot industry sectors and emerging markets.
