Economics, Videos

Dan Godfrey: fund management must change, or people will “march down the street with pitchforks”

Dan Godfrey: fund management must change, or people will “march down the street with pitchforks”

Published on Mar 17, 2016

Merryn Somerset Webb talks to Daniel Godfrey, ex-chief of fund managers’ trade body the Investment Association, about management fees, executive pay, and how to improve the industry from the consumer’s point of view.

Dan Godfrey: fund management must change, or people will “march down the street with pitchforks”

0:03hi I’m Merryn Somerset Webb editor-in-chief of money week magazine
0:08welcome to another moneyweek video I have with me today Daniel Godfrey Lee X
0:12chief executive of the investments Association we’re going to talk about
0:15huge variety of things across the fund management industry how funds to work
0:20hard charging should work what would make the industry better or better from
0:23the point of the consumer anyway but first we’ll just talk briefly about why
0:27when I introduced Daniel I introduced him as the ex chief executive of the
0:31investment Association what what happened there
0:33well good morning mary well simply what happened at the investment Association
0:39was that a small number of quite large members took the view that they weren’t
0:45happy with the direction of travel of the Association I made it clear that
0:48they intended to leave and in a trade association real strength comes from the
0:54unity of the membership and so clearly even if it’s a small percentage by
0:59number and even a relatively small percentage by total value of the assets
1:03managed it gives you a real and immediate problem because you need to be
1:06able to speak with a single unified voice and i felt considered it was put
1:12in the interests of the Association for me to leave and so about two months ago
1:17I did several of those people left anyway right well I don’t know what the
1:21outcome ultimately will be clearly the world were a couple who had indicated
1:27that they intended when I saw you at St James places said they would be
1:31schroeder’s exhibitors so your health and your soul is made no difference was
1:35well I don’t think there was much of a choice to tell you the truth
1:40clearly there was a very public discussion going on at the time mobutu
1:45concerned about other members might follow the ones you indicated that they
1:50intended not to renew as far as I’m aware though the only one that’s
1:53publicly made any comment is James’s Place and so I think you’ll just have to
1:58wait and see what the outcome is you know whatever is reported i’ve seen
2:02nobody actually making any public comment from any of these companies
2:06expressing any dissatisfaction with me or the direction of travel of the
2:10investment Association which was executing structure in that direction of
2:16you were trying to do something very specific association yes the mall the
2:20strategy of the investment Association was to try to make investment that sir
2:24we believe that when you say better what do you mean better is rated better me
2:30more profitable well I think that there’s no tension between the two
2:36actually it starts with better for the consumer so if you can make better
2:39investment better for the clients we believe that makes it better for the
2:43companies in which we invest but if the economy and better for the long-term
2:47sustainable commercial success of our members that necessarily follow any of
2:51them members of the investment Association Inc stunningly commercially
2:54successful for many many many years now they don’t pay much attention to the
2:58needs of the consumer at all I like to think that I agree with you I’m not sure
3:02that it necessarily follows it treating your consumers well lead to a more
3:06proper business that’s a better business depending on how you define them but not
3:10a more profitable business for the members of the investment Association
3:13that doesn’t matter what I can see why you might say that but of course I think
3:16you’ll also be the first to say that the past is not necessarily a guide to the
3:20future and we’ve been seeing both disruptions retain more G disruptions
3:24Renu entrance we see prices coming down she usually in passive funds and I think
3:29we’re also going to see a regulatory focus on the investment management site
3:32that the banks have been having for the last few years and so what has been true
3:36in the past may not be true the future I think there’s also a fundamental
3:41philosophical point here which is that when a client pays investment managers
3:46who manage their money on their behalf let him speak their agent and if you
3:50think about what an agent is what it means to be
3:52regions I think it’s pretty clear that you pay someone to be you just a better
3:56version someone who knows more than you do about something so much greater
4:00expertise may be greater networking greater connections greater facilities
4:04and technology maybe someone who can you scale but effectively to do a job that
4:08you would otherwise have to do so and if you pay someone to do that to act as you
4:12know I think that agent has a responsibility to behave as I they are
4:16you and what your interests first so I don’t think there’s really any the
4:22average investor cares about how companies run cares about maybe social
4:30or environmental policy cares about how much TV executives are paid except maybe
4:35they don’t all they care about is how much money they get out of the end
4:38there’s another connection here that I think I agree with you but which for the
4:44man on the street the investor on the street might look at the schedule I
4:46didn’t feel like I might have given these people my money to invest really
4:51given them is my hope that my dreams for the future and those hopes and dreams
4:55are connected entirely 100% to money that man can make me and how much the
5:00chief executive the company’s impotent and daily by the by how much money can
5:03he general for me so maybe it’s too complicated
5:07no I don’t think so maybe I have actually because I wasn’t the point I
5:10was trying so no I think it’s very good
5:17so really what the point I was trying to make now is that you
5:21investors are paying me to do the best possible job for you and get you the
5:25most money and that involves during your money carefully through the capital
5:28markets not allowing the broker’s other intermediaries in those markets to
5:35extract more rent than is absolutely necessary we are your agent we should be
5:38your champion in those markets we should get the best possible return them to
5:43come back to your point there’s a question I think about time scales time
5:47horizons so yes it may be that if we are only focusing on how much money I
5:53companies making over the next three months 12 months maybe even two or three
5:57years that the environmental footprint of the company the way they treat their
6:02employees the reputation maybe they have in their local communities on the pay of
6:06the chief executive is not readily funds but if we’re looking at investing in
6:10companies rather than just trading installs if we’re looking at it against
6:14the time arises that I think you know your readers hob which will typically be
6:18and twenty years I mean even someone like me in my mid fifties I’m really
6:23thinking about saving money maybe for the next ten years before I start using
6:27it but I hope to have fifteen to twenty years before stopping eating at all but
6:35over those sort of time horizons you will be investing in great companies
6:40that are going to deliver consistent over 5 10 15 20 or more years and I
6:46think they’re actually the way they treat their star the development they
6:50put into their staff the strategies they have the governance that Morgan exert
6:55and yes the pay of the chief executive their environmental footprint and so on
7:00actually do make a difference two great companies gonna be around for a long
7:03time he did you created that statement of principles of things that you feel
7:09the organization at the time that appear to feel that investment managers should
7:13should go by and I’ve got them here and they are pretty innocuous stuff really
7:19always put land interests first and head of their own interests you
7:26take care of plants many as diligently as they were there is your regular time
7:29the clear lines of communication etcetera
7:31what was in here that any particular organiser Phil they’re unable to sign
7:38because in the end what you got to remember that the percentage of
7:42institutions about 30 percent of the assets under management
7:45connected to the to the I signed up in the air and that’s it there’s a pretty
7:49small number relatively innocuous that sound relatively innocuous to someone
7:55who’s not logged in the industry doesn’t have quite a bit of a surprise to me
8:00that we haven’t got more we didn’t get more of the members to commit themselves
8:05to this over the time scale since they were first launched and I think that the
8:10biggest reason why that happened be more signing to it is that we put a
8:15requirement around the principal say that anyone who signed them had to do to
8:20other things not just saw in them and say we believe in these days I think
8:24we’ve seen those coming out of companies is over the last ten years and they
8:28don’t necessarily mean anything so we put in place to additional standards try
8:33to give people reading those principles and seeing the companies that sell and
8:36get some confidence that I actually meant something that involves
8:40signatories doing two things I said firstly putting statements on their
8:44websites are setting out in their own words how they implement these
8:48principles within their own firms what the principles means them how they look
8:52for how they recognize issues that may be challenging to them and how they
8:56identify them and deal with them and then secondly a year for their own from
9:01to make a statement on their website saying that the their approach to
9:05implementing the principles is working on identifying any issues they’ve
9:09identified now they’ve dealt with them and i think what I didn’t
9:14expect I suppose the time we put this out in April this year was that a number
9:21of firms with look at this and say what if we’re going to make these statements
9:24then we’re going to have to put this through our own entire internal
9:28compliance process and show how we can evidence not just that we say we’re
9:32doing it but how is someone came along to us and said show us your audit
9:35process we can do that and I think a number of firms of felt not but they
9:40don’t follow these principles not that they don’t believe in them but they’re
9:44wondering scratching their heads a little how do we go about evidence
9:48clearly there have been twenty five firms who’ve taken the view that they
9:52can just get on with it but I think I have some sympathy in this very detailed
9:59regulator environment people live in with firms who decided to take that
10:04approach I think my own view wars that this is a high-level statement of
10:08principles and that what you’re committing to do is to do your utmost to
10:13live by them and so I think had I been running of them I would have been in the
10:17camp which side will you let’s play up this let’s tell people how we do it and
10:21let’s get on with it if we identify they were not doing something here where we
10:25really well should be used to express that I have some sympathy of people live
10:34in a in a very compliant
10:35correct wording is found for the peace of compliance regulations that sits in
10:42this if this were to add on top
10:45yet another layer of regulation by already whether it constantly trying to
10:50meet the wording that is required for things when they hopefully feel that I’m
10:58already fulfilled without having to jump through Thursday yeah well I think of my
11:05feeling was and I think there are others who take that view that that’s not
11:09necessary that’s not an implication of having a high-level statement of
11:12principles which you are committed to doing our utmost to uphold but clearly
11:17people take
11:18take their own views okay let ya what is the perfect fun how was the perfect
11:26funds lookin ideal but I can tell you what I like but that’s just my own
11:34emotional I’m not a professional rider on this which he said please don’t
11:44regard this is a voice in any way shape or personally as you may already got the
11:51INS I like investing with conviction in companies like I believe you going to be
11:58around and successful for long periods of time so I’m looking for actually
12:02conviction investors who have relatively high concentration and low turnover
12:13far away from the benchmark with a relatively small number of stocks 2025
12:19anything depends on the size of the fund be a relatively small fund because you
12:26don’t want them holding positions in the dogs they can get in and out quickly and
12:30exhibitor you can have larger funds with higher numbers of positions but yeah and
12:36how is the guy running the front page and then I feel this is something that I
12:44been that was influence on over the years because I think that in theory not
12:52just in theory I think there’s no reason why for instance of performance
12:56performance be make someone come into work and do a better job everyday
13:00shouldn’t actually they should be coming in trying to find the best stocks doing
13:04their analysis and so on but then from I can see also from a consumer’s
13:08perspective it’s only feels a lot better if the fund manager only makes an awful
13:13lot of money when they made you an awful lot of money so I’m actually quite open
13:18minded to different different models I think really what’s key to me actually
13:23is the style of the manager and the track record of the moment because if
13:28they’re going if they perform the way I think that sort of style will perform
13:33over long periods of time then whether the man I just paid you know I fly one
13:38percent or IHOP with almonds fee is going to make a lot of different
13:44ok well as an easy to use an easy number around them pull that out as an example
13:52of a flat 1 percent I think there’s a lot of us and
14:00starting with a small amount of money it’s really show on the road if you want
14:05but everybody who comes to me with a new fund management company whatever I was a
14:11fan you know we we won’t be supporting your local plan to bring the way but I
14:20want to do something tiered and I don’t want their performance here want to see
14:24the manager putting a large amount of his personal wealth into his performance
14:31fee is a good return on his own money
14:34ok fine you know you can have your 80 basis points or whatever it is but
14:42twenty of those industry baggage so I think that you know as I said at the
14:47beginning I think in theory I’m not a fan of performance but then I look at
14:51something like Neil Woodford’s patient capital investment trust launched where
14:56the underlying cost just to meet the running costs and there is no management
15:02fee except the performance fee which they can if there’s an overtime percent
15:06return and I don’t think I really feel but a good model because too many
15:13management anything he’ll never know I think I don’t think it does I think
15:20there’s
15:21an independent board thought being controlling that and so would hope the
15:24board would have good governance process so that that is the underlying running
15:29costs administration North should be paid a reasonable price
15:35doing a reasonable job and as soon as you start looking around at that they
15:38will I’m gonna take a penny not mean like this until I a level that suggests
15:43that you weren’t doing a reasonable job already I think it’s such a dog area
15:47well enough that I would probably not a compromise before I was running fine but
15:52then I think you have to look at for managers and say well some of them have
15:57capacity issues some of them will close bonds once they reach a certain size and
16:02so there is no their management skill if you like is a scarce resource but if you
16:06go back to the statement of principles and you’d see that one of the principals
16:11would be that you know you shouldn’t charge so much that you can’t deliver on
16:16your customer proposition so I think that that is a really good yardstick
16:23take I think also that I agree with you i think that the industry is not great
16:29sharing the benefits of economies of scale with the customer and I do think
16:36that that’s one of the things that we’ve seen in passive yeah that we haven’t
16:40really seen in a new movie scene impassive as responsive got bigger
16:44Picasa calm down and I market is kind of a commodity whereas if you don’t know
16:54what’s going to happen in the future what you know well not the ones that I
17:01am active during a brief and what do you think these will settle
17:08really have absolutely zero idea on that that you know you work incredibly hard
17:17for inside the industry to try and improve it
17:19try and improve transparency bring down feat
17:23feeling that it may in the end comfort me outside and it never has in the past
17:28because people have saved differently to have a good saving the future retirement
17:34money for a time when do they really have until quite recently retired and
17:40then they had either final salary pension or annuity and so how the money
17:44was run during their retirement with nothing to do with pensions freedom you
17:51have hundreds of thousands of well-educated people coming into
17:57retirement in good health
17:59sixty or knowing they’ve got thirty years worth of looking after their
18:05computer literate they get any kind of information they want anytime
18:08yeah and while 1 percent might not sound like much when you’re living of that
18:14money when you’re retired and the yield of 3% certainly in a third of your
18:21income away in these makes a difference that I suspect it’s going to be that
18:23army of bullshit pensioners you are going to transform that industry because
18:29they won’t have it won’t put up with that they could be i mean the return
18:32number of directions it could come from the world well good for them it could
18:39come from that and of course it could come from multiple sources at the same
18:42time so it could come from client driven it could be new technology driven it
18:47could be regulators all of them will create pressure now again you know I’m
18:55seeing your personal view and when I start
19:00supplementing my income from my savings who knows when that will be maybe next
19:05year but I find another job but when I start her so when I do start and I hope
19:15it won’t be for another ten years or a bit more but when I start supplementing
19:19my income from savings my view is that equity income is a pretty good way of
19:24doing that and I think that’s one of the big changes that we’re going to have
19:28over as we get new coats are people coming into pension freedoms with you
19:34know looking forward maybe to twenty or thirty years more of life is that it’s
19:37not just a question of will go into a portfolio of bonds and take the income
19:41from its gonna be your gonna be around for a long time and you know having
19:47capital growth in a reasonable income is not about idea so and of course a good
19:53equity income fund is a pretty simple product compared to some fancy shmancy
19:57guaranteed underneath with a bit of upside and so that I think we’re going
20:03to see now I’m not saying that’s going to be a bad thing for everybody because
20:06not necessarily a new team but it could become an annuity later because a lot of
20:15people at what is it they say you going to be go go slow go no-go in retirement
20:19and certainly equity income would cover I think go go and then you can start
20:26there may be pushing it a bit of capital later on there has to be the industry
20:59and of course this market has been in the past five companies in annuities and
21:25investment managers what they’ve been the ones running as pools of assets
21:29satellite companies gather the assets into annuities but it’s still being
21:33either subsidiaries of the life companies or other investment I just
21:37have been running the outside and they’ve been gradually paid out anyway
21:40so it’s kinda moving from one place to another robbery and you know having
21:44assets that and then disappearing it’s it’s just a different way of doing
21:47things and it hasn’t in the past with annuities so of course it would be an
21:56interest but you know hey you know get real
21:58in fact it’s not so much your readers who of course I worry about but I think
22:05the people who we really should be worried about the millions coming
22:08through or not your readers with relatively small sons a retired yes well
22:17you said the hundred thousand hundreds of thousands who are going to be
22:20complaining about you I think many people coming into
22:26the part of their lives when against me unless I must think retirement is a word
22:32I try not to use any more because I think there’s very few people who get to
22:36their particular birthday and then never do a day’s work again and liberal some
22:41pool of will have the answer to disappoint you but as a base and I i
22:50think that they are going to have a pretty tough time and I think that
22:55taking big for users of them the products which probably will give them
22:59less volatility because they’re scared of perhaps the value of the fund falling
23:05is not going to be in their best interest so I think we really have to
23:09think through as an industry how we can do the best possible job for these these
23:14customers go back to my daily humiliation and that you have a double
23:20problem management industry itself is very hard for them to get on a high
23:26horse about high level 20 everyone just turn around and say well glass houses
23:33made it difficult it’s a difficult situation it hardly helped fund
23:37management industry can really challenge the corporate industry well I think it
23:42could and it sometimes does because ultimately you know do have the votes so
23:52if investment managers choose to exercise voting power then I’m gonna do
23:59chief executive of corporate much good to say glass houses because they don’t
24:04have votes we did so I don’t think that’s a reason for the investment
24:09management industry not doing a great job there are other difficult you know
24:13if you’re earning fifty million pounds yourself didn’t go through the problem
24:16with someone else only fifteen million pens and paper
24:23one other people would consider to be a vast amount of money 2000 so you know a
24:30lot of people look at this is endemic throughout the energy industry that
24:34people are paid sums of money makes it difficult for them to see how it’s seen
24:39it looks from the outside but that there are things you got a point on it may be
24:44difficult to see how it looks from the outside but I don’t think it makes it
24:48impossible to say because I N 15 million it’s all right for you to 115 million I
24:52mean I probably think I’m worth every penny and I think you can even see that
25:01in your own children’s book it money debates so that you know I don’t think
25:05that that’s a reason why not I think the problem we have with in financial
25:09services but also within corporate pay is there’s been an arms race and it’s
25:13very difficult to bring an end to an arms race so if we put to one side for a
25:19moment paying the sectoral sure you want to come back to it but just look at the
25:24paper CEO’s the executive director of listed companies you had an arms race
25:29there’s been a lot of attention over the last fifteen twenty years from
25:32government trade unions the media corporate governance experts within
25:36investment management firms and what’s the result being a result of more than
25:39worse actually the result being that pay structures have become incredibly
25:43complicated and plays going on and my kids call an epic fail so my view is
25:50that we gotta do something different and probably the place to start is with
25:54complexity is very difficult
25:57within arms raised to say everyone gets one quarter of what they’re currently
26:02earning it is very difficult just come along and say that I think it would work
26:06but I think what you can do is say the complexity of these games makes it very
26:11difficult to work out particularly in advance whether people are gonna have a
26:15lot of money for delivering stunning byou or doing something very mediocre or
26:19even perhaps a failing and so I think we do need to move to a much simpler such a
26:25play structures for executive executives
26:30well it depends so one of the things that I was able to do before I left the
26:41association with two sets of executive remuneration working group or only six
26:47ppl
26:49100 chairman 100 CEO and investment manager a pension funds and it was gonna
26:58be me but no longer and they are under champs are in the chairman of the
27:01Remuneration Committee all of whom believe that there’s a problem with one
27:06task which was to bring forward a proposal for a radical simplification of
27:11executive pay basic think that if you get a really incredible group of people
27:18together to bring forward a proposal you just you might just have a chance of
27:22getting something done clearly the others others who have a problem I would
27:32say I didn’t ask all of them that question but I do only 1 I’d like
27:38conversation with would recognize that their pay is actually way out of line
27:44with value relative to other jobs in society
27:49you know so and I think that yeah actually I think I would say when I said
27:59nothing has been a few months so you know my memory is fading a little I
28:03would say that if I try to remember this wording of the press release will be
28:06announced it I think I said that executive pay and was damaging the
28:11reputation of business and from management’s
28:14with society and that was intolerable really in the long run so we can keep on
28:20going to keep on passing I keep on collecting the big bonus checks but
28:25eventually people will be marching down the street with pics pitchforks and
28:29burning torch
28:31this level of trust between the corporate world which is not good for
28:39the corporate world in the long run so and of course the clients and the
28:51industry on not just exposed to the the shares that a particular fund manager
28:56all but they’re exposed broadly across global markets global companies through
29:00their various ones but also citizens were exposed to the overall output of
29:06industry and economic growth that generates so I think we as an industry
29:11needs to take a more holistic view and then coming back to pay within the
29:15sector and again as an arms race issue that but i think thats we you know I’d
29:25like to see new models I think the bonuses on not really about they know
29:32about performance incentive isolation might be others we don’t you i think
29:37that people come into work they do a good job they generally want to do the
29:41best job they can cause the bonus make them work order I’m not sure it does
29:44research into this in all the evidence is that it doesn’t do what it can do so
29:54you can get perverse incentives but I think bonuses and they’re actually for
29:58two reasons one is to attract and retain so you know again commercially funds
30:04need to attract and retain the best staff and if they get bonuses elsewhere
30:09they needs unity of the bonuses so we got that sort of arms race problem and
30:13the other right thing which is also a something that I would be negatively is
30:18that they used to micromanage people so post financial crisis you might put it
30:24in to try to get the behaviour you want as opposed to behaviors you don’t want
30:29and I’d say that thats what she shocking abandonment of management and leadership
30:33which is i think what you have to do is to get the right behavior is not try to
30:37do it through paste roaches
30:39you know when you’ll ask why do banks basis big businesses and might have fun
30:45management company basis big businesses the answer is because they can because
30:49they’ve been able to make for decades now super profits that other businesses
30:52have not been able to make therefore they have the money to pay these bonuses
30:56that no one gets the goons in the publishing industry because this is a
31:00should be competitive industry yeah but I said the money comes down to the fact
31:08that if you allow an industry to continue to make super profit you can
31:12expect them to being able to I think it’s also about the arms race because
31:18when you take something like Bloomsbury publishing and they must have had at
31:22some points money coming out of there is from the JKB rallying royalties you know
31:26was the temporary super heroes on for a while everybody everybody is not is not
31:36in the same since immune to go ballistic condition at the same time and therefore
31:40able to make super super profits by just one asking is actually the publisher to
31:46the editor of her opposes books and tens of millions was the money playing
31:51through to make a ruling as pets you think you should do
31:55onto the shoulders of Bloomsbury with executives in the middle of that making
31:59super profits are probably not having the 15 million as interesting to me okay
32:08I think we will probably come to an end but just one thing she could make one
32:12James just one change because obviously we can’t do everything it was one change
32:16that you could make to that fund management industry
32:21the space thanks very much for just that there’s going to be a run on cash that
32:32people are gonna want real cash to buy real cash I mean dollars actually he
32:38says a paper because the whole economy works on credit