What’s wrong with gross of fees?

My inbox is bombarded almost daily with the latest report or white paper on such-and-such industry topic.

I can’t read them all, but I always make time for reports on fees and the great battle between active managers and the index.

What’s caught my eye—and ire—is that some data providers present active manager performance reports gross of fees. These studies make managers look better than they are.

Let’s be clear: I’m not winding up for an active management hate-fest, followed by an ETFs-are-the-white-hats sermon. I’ve previously used this space to defend managers with high active share scores.

I’m also aware passive investing can be painful, as it was for Japan’s Government Pension Investment Fund last year (it recorded a loss of $64 billion in the third calendar quarter, in large part due to passive equity investments).

This isn’t about investment style; it’s about a way of presenting data that’s out of step with where the industry’s going—or where regulators in Canada and elsewhere are forcing it to go—on the disclosure front. This is the year everyone’s been waiting for, when the final and most significant CRM2 requirements come into effect. Firms and advisors will soon be required to give plain-language, dollars-and-cents explanations of all fees.

Everyone’s talking about fees, and how to be 100% sure they’re disclosed properly. Researchers who provide data on active managers’ performance are not, of course, subject to CRM2’s requirements. However, they should act as if they are, by adhering to the spirit of those requirements.

Advisors I’ve spoken with agree: stats on managed money should be given net of fees because the people who ultimately use those stats—clients—pay fees.

One data provider’s shown it gets it by introducing an Active/Passive Barometer that gives a net-of-fee comparison of active funds against passive alternatives—but the data’s U.S. only.

We need this kind of information in Canada. Some may argue gross-of-fees reporting is actually preferable. Different clients pay different fees depending on the fund series they buy.

Allowing advisors to do the fee calculation themselves enables them to customize results for clients who are in different fee categories.

Fine, but there’s a catch: for this to work, the research must be accompanied by an explicit, highly visible statement noting the raw data has value only after advisors factor fees.

Investors are making real-world decisions, and that means they need real-world data. Touting active managers’ gross-of-fees performance is at best unrealistic; at worst, misleading.

Agree? Disagree? Respond in the comments or write to Dean.DiSpalatro@advisor.rogers.com.