Terry Smith, the CEO of Tullett Prebon, has a reputation. The FT refers to him as a “combative City broker”. The Daily Telegraph calls him the “famously combative City tycoon”. Breakingviews opts for “pugilistic”. Pretty much everyone refers to his style as “aggressive” or “outspoken”.
My own experience of him suggests he’s ruder than most. He, of course, considers himself straight-talking. I don’t suppose his reputation has people making a bee line for him at parties, but I also don’t suppose he cares much. If he did, he wouldn’t be talking about taking on the fund-management industry.
He is, says Financial News, about to launch a new venture, Fundsmith, with the aim of undercutting everyone else on fees. There isn’t much more detail than this yet. But if Smith is going to get out there and do some straight talking, we’re in for a treat.
If we’re really lucky, he’ll point out that the fee structure invented by fund management firms is an outrage. He will rail against the idea that management fees should be a percentage of the funds under management – so they go up automatically as new investors join, regardless of performance. He’ll point out that this makes the fund’s size far more important to the managers and their bonuses than how their funds actually perform. He’ll add that this creates vast marketing costs, which are – totally unfairly – borne by existing investors rather than new ones. Then he’ll scrap every confusing percentage-based fee there is and charge a single flat fee for administering and managing the fund. That would discourage over-concentration on marketing, stop pointless churning (the costly buying and selling of shares by fund managers) and end most other expensive but not strictly necessary practices. It would also make the cost structure transparent – which would be very unusual, but very nice.
I hope he’ll do all this – things need shaking up. But I also hope he might do more. We’ve mentioned before that when it comes to taking blame for the financial crisis the big fund managers have so far got away almost scot-free. These men were the main shareholders in the big banks whose behaviour paved the way for the credit crunch. Yet they did nothing about the risks the banks were taking, and nothing about the salary and bonus structures that encouraged them.
Why? Andrew Ellson sums it up in The Times: because “they themselves benefit from the merry-go-round”. The more everyone else in finance gets paid, the more general expectations rise and the more they get paid. That gives them no incentive to criticise anyone else. But by all accounts Smith doesn’t need any incentive to have a go at people. I’d hope that would make him not just a better fund manager, but also a more proactive shareholder than most of the ones we have just now.