Paid more than Buffett — are they worth it?

Investment banker turned venture capitalist Mark Carnegie recently went on record criticising the fee structure of private equity funds and suggesting that many fund managers didn’t produce returns commensurate with their salaries.

Carnegie, who has had experience running public companies including STW Communications (ASX: SGN), building private companies including corporate advisory business Carnegie Wylie, which he and partner John Wylie sold to Lazard Australia for a reported $200 million, and most recently establishing venture capital, private equity and advisory firm M. H. Carnegie & Co. This wide array of interests and experience, gives Carnegie insights and knowledge of just how much investors are forking out to managers for investment services.

Given the trend towards low-cost industry super funds and the increasing awareness (finally!) by investors that many funds fail to keep up with the benchmarked returns of an index fund, we may begin to see fees and salaries paid to fund managers come under increased scrutiny and pressure. Without an insider’s perspective such as Carnegie’s, it can be hard for us Fools to gauge potential salary and fee gouging as rarely is it disclosed.

Luckily, we are able to garner a couple of benchmarks from some outperforming investment managers who are required to report their salaries. Investment great Warren Buffett last year received a salary of a modest US$100,000 — it has been this rate for a number of years and certainly gives investors great bang for their buck. Buffett’s total remuneration was a heftier $491,000 though, as Berkshire Hathaway picks up the bill for Buffett’s personal and home security.

Another exception is Kerr Neilsen, the founder, managing director and a fund manager at Platinum Asset Management (ASX: PTM). Given his executive board position, Neilsen’s salary is disclosed and came in at nearly $450,000 last year. Other listed fund managers including Perpetual (ASX: PPT), AMP (ASX: AMP) and BT Investment Management (ASX: BTT), don’t have the cross-over in roles between fund manager and management, so the excessive salary question remains a mystery.

Foolish takeaway

As investors we should be happy to pay for performance and outstanding performance can warrant outstanding pay. However it is important to be very wary of paying high fees and salaries for mediocre or poor performance, as in the long run this will eat into the returns we receive.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur owns shares in Perpetual and BT Investment Management.

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