May 4, 2016

Death By a Thousand Cuts

In the U.S., over $13 trillion of institutional capital relies on consultants for advice on which funds to invest in. Pensions, endowments, foundations and other large pools of money utilize consultants for a range of services, most notably picking different outside money managers to invest in on their behalf.

Research shows that investment consultants as a group add no value through their selection of investment managers. They chase past performance and make far too many unnecessary changes. Data also shows that the managers consultants fired have gone on to perform better than the ones they hire.

The paradox here is that these non-profit institutions need outside advice in most cases. The majority don’t have the time or resources to monitor their portfolios or pick and choose new investments.

That’s a full-time job and many of these funds can’t hire full-time investment staff. The problem is they’re paying for the wrong kind of advice.

Warren Buffett seems to agree with me. Here are his thoughts from the Berkshire Hathaway annual meeting last weekend:


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