Who has benefited most from quantitative easing (QE)? You might say bankers – and you could argue that being saved from oblivion with reams of printed money is something to be very grateful for.
But if we’re talking salaries here, investment banking pay has fallen hard (in real terms, at least) since 2006, according to the Financial Times. No, the real winners from QE have been asset managers – the people who invest our money on our behalf.
A study out last week by think tank New Financial looked at “average compensation cost per employee”. Between 2006 and 2014 the average cost of an investment bank employee fell by 25% to $288,000. Meanwhile, the average cost of asset management staff rose by 22% to $263,000. If that continues, says the FT, asset managers will overtake the investment bankers by this time next year.
How has this happened? It’s pretty simple. As William Wright of New Financial puts it: “investment banking staff are taking a shrinking portion of a shrinking pot”. Business has declined and banks have been forced to crack down on compensation. Asset managers, on the other hand, “are taking a constant portion of a growing pot”. Fund managers get paid a percentage of the money they look after.
So as the overall pool of money they’re looking after expands, they get more of it, even if they don’t do any more work. And one thing that QE has done is to force more money into the investment markets – partly by repressing interest rates (forcing people to take more risk to make acceptable returns) and partly because the central bank money used to buy government bonds then needs to be reinvested in something by the recipients. So inevitably, assets under management have grown (doubling since 2004) – and pay packets have grown right along with them.
This is, to put it bluntly, nuts. If even a third of “the gains in efficiency and scale in the past decade” had been passed on to clients – savers like you and me, in other words – pay would be 15% lower, notes the FT. But a lack of transparency and a poor grasp of just how much these companies are creaming off our returns has allowed the industry to get away with snaffling the gains for itself.
There are signs that things are getting better. For example, the Swedish government has now launched a formal investigation into ‘closet trackers’ – funds that charge expensive active management fees but deliver “passive”, benchmark-hugging performance that could be had more cheaply elsewhere.
In the UK, the banning of kickbacks to financial advisers has put more pressure on fund managers at least to consider value for money, rather than compete on how much commission they can afford to pay. But if they need more motivation than simple good customer service, asset managers should just look at what happened to the bankers – and get a grip now before someone else does.