Generally speaking, the more experience an expert has in a particular field, the more compensation they can command for their services. Specialists in a particular area with more experience are also usually granted a higher level of trust, respect, and responsibility from their peers.

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Some of the time, this special treatment isn’t warranted. Some studies have shown that the vast majority of so-called “expert” views are nothing but guesswork and more often than not the expert’s highly valued advice is wrong.

There is a continual debate in the field of finance whether or not it is worth paying a premium for financial advice from a more experienced asset manager. In today’s world of low-cost ETF’s and tracker funds, paying a manager 2% per annum seems to make no financial sense, no matter how experienced they are.

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Michael Cembalest at JP Morgan believes investors shouldn’t be so quick to dismiss financial advice from an experienced asset manager. In Michael’s August 1 Eye On The Market research report, the JP Morgan analyst looks at the relationship between experience and outcomes in several different disciplines including government, business, the armed forces, medicine, education, money management and transportation.

The data shows that in most disciplines, more experience typically translates into better results.

Experience typically translates into better results

A study published in 1995 confirmed that more experienced army officers performed better under environments of high stress compared to those who had a shorter military career while a study from the Ohio State University in 2009 confirmed that more experienced legislators are more efficient. Representatives with a Congressional tenure of ten years or more have a legislative effectiveness score of almost double that of those in their fifth term.

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Similar trends are seen in many other professions. More experienced pilots have fewer crashes than pilots with the least amount of experience (Johns Hopkins University. 2002.), more experienced drivers have fewer accidents, (AAA Foundation for Traffic Safety. 2009.) and teachers with more experience generally helps students achieve a higher level of academic accomplishment (Learning Policy Institute. June 2016. Scope: K-12 public schools.)

Is it worth paying for more experienced asset managers?

When it comes to asset management, the numbers show that it probably is better paying a little bit extra for the more experienced manager.

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A study published in May 2015 (OSU, Harvard, NBER) showed that in the run-up to the 2007 financial crisis more experienced portfolio managers had lower risky mortgage exposure. Moreover, more experienced portfolio managers had less tech exposure at the peak of the Tech bubble. Portfolio managers aged 56 or more tended to be underweight tech while those in the 25 to 30 bracket were significantly overweight the sector.

Is it worth paying for more experienced asset managers?
Is it worth paying for more experienced asset managers?

 

Another interesting trend Michael Cembalest picks out is the performance of large technology company CEO. Specifically, the median three-year company revenue growth rate of CEOs with plenty of prior experience compared to those with little or no experience in running a tech company. As the chart below shows, the more experienced CEO generated much higher revenue growth than their inexperienced peer.

JPM 1And if you think this ties into politics, Michael Cembalest  goes there and notes:

No clear trend. In addition, while these rankings reflect the skill of a President, they also reflect the good or bad fortunes they faced from the business cycle; political and military conditions around the world; and domestic disturbances related to civil wars and other social issues. We’re also dealing with a small population sample of less than 50 individuals. If we want to analyze the importance of experience in leadership and management roles, we can look elsewhere….

Presidential-election-experience-trump

What about other professions? See the charts below.

experience-vs-skill-pilots

Experience-vs-skill