Should-Read: Noah Smith: Why Money Managers Are Paid So Much Is a Mystery

Should-Read: Noah Smith: Why Money Managers Are Paid So Much Is a Mystery: “Mutual-fund managers are paid less for beating the market than for marketing—i.e., the ability to collect assets…

…This bolsters the notion of “money doctors”—the idea that managers mainly add value by building trust with investors. Investors are naturally wary about putting their money in stocks and other risky assets, and want a qualified professional to tell them it’s safe to do so. This could potentially be a win-win relationship; investors pay fees, but get higher returns than they would if they had stayed out of the market. Or it could be a potentially toxic relationship, if managers use personal or cultural affinity to sell investors on a bad deal. More research is needed in order to tell how many money doctors are really quacks. But the new research into fund-manager pay also shows that a large percentage of compensation remains unexplained, having apparently little to do with fund size or returns. There is a lot of money sloshing around in the financial industry, and much of how it gets divvied up remains a mystery…