The "overpaid" fund management industry is destroying $1,300bn of value annually, according to an unpublished draft report conducted by IBM.

The document, seen by FTfm, claims the industry is "paid too much for the value it delivers" and that "destroying value for clients and shareholders is unsustainable".

It also carries a prediction of swingeing job cuts in parts of the industry, such as sell side research, credit rating agencies and funds of hedge funds.

The wide-ranging report, Financial Markets 2020, is based on a survey of more than 2,600 industry participants and government officials across 84 countries by the IBM Institute for Business Value.

The bulk of the value destruction, almost $1,100bn a year, equivalent to 1.9 per cent of global gross domestic product, is seen as impacting on clients. This includes $300bn in excess fees for actively managed long-only funds that fail to beat their benchmark (this figure is quoted as $834bn in the draft report but it is believed IBM has since revised it lower), $250bn spent in fees for wealth management and advisory services that fail to deliver promised above-benchmark returns, and $51bn in fees for hedge funds that also fail to deliver their targeted returns.

Credit rating agencies, sell side research and trading are seen as destroying a further $459bn, largely due to the perceived inaccuracy of much of the analysis these sectors deliver.

Across the financial sector as a whole, IBM said "alpha generation" or the ability to deliver index-beating returns, was "pitiful", despite the huge sums paid in pursuit of this. Perhaps unsurprisingly, it found 87 per cent of investors expressed no loyalty to their "primary investment provider".

David Fuller's view This is an important subject familiar to veteran subscribers.

The problem of high fees for mediocre performance has been mentioned by numerous subscribers as the main reason why they prefer to manage their own money.

Why is fund management performance often mediocre? Well, if it was easy everyone would do it. Also, job preseveration is a very inhibiting factor, especially when investors in a fund have 20-20 hindsight. Investment managers know that they will probably survive (retain most of their money under management) if their performance is near the middle of the flock for their sector. Consequently, they tend to move in unison, like sheep.

How did money management fees become so high? The answer can be summarised in two words - investor gullibility. Some highly leveraged hedge fund managers, with the wits to ride a bull market trend, achieved enviable performances and were feted like rock stars. They soon introduced a 2 percent annual charge and also a performance fee of at least 20 percent, justified by their goal of 'absolute return'.. Slick marketing and a bull market enabled other investment management groups to launch new funds charging fees of 2 and 20, which soon became the industry norm. Some charge more.

A minority of investment managers do outperform both their benchmark and their sector rivals. Those who do this over a decade or more earn their remuneration. I do not like paying high fees any more than anyone else, but I will on occasion for specialist knowledge and competitive performance. Investors are advised to do their own due diligence regarding both fees and performance of any funds of potential interest. Prospectuses can be found online and the Chart Library will be of use in the assessment of relative performance.

 For more on this subject the Fullermoney Archive contains 12 other items on high fees. I produced the link above by using the Search link shown upper-left, fourth item down, and typing the words - high fees - into the window provided.