Industry Veteran Peter Kraus on Innovations in Client-first Fee Structures

By Nicsa posted 03-18-2020 11:41 AM


Nicsa members kicked off the 2020 Strategic Leadership Forum in February with a deep dive into fee structures with Wall Street veteran Peter Kraus.  For more than four decades, Kraus worked at major financial institutions — including Goldman Sachs, Merrill Lynch, and AllianceBernstein (AB).


In 2018, as a vocal proponent of pay-for-performance compensation models, Kraus teamed up with the Italian insurance company Generali to launch Aperture Investors, which he now governs as chairman and CEO. The asset management company, headquartered in New York, offers actively managed strategies with performance-linked fees.


Kraus opened the presentation with an overview focused on which investors are paying for performance, what’s incentivizing portfolio managers, and how the asset management business model is evolving to address structural shifts.


“In a global industry that’s quite fragmented with many players, change happens relatively slowly, so it’s not that easy to identify,” he said. “One of the things that has struck me over time is that we are, in fact, at a crossroads in the industry.”


This is especially true when it comes to the debate between active and passive funds. Kraus said that active flows are challenged because passive funds are providing a service that asset managers are not  – and that’s the key issue. Ultimately, he said there is so much money in the world that it can’t all be actively managed.


“There need to be more passive funds — and fewer active managers, with fewer assets, producing more performance,” Kraus said. “If you change the fee model and you actually perform, you will make more money. Will it be easy? No. It will be more difficult, but you’ll make more money and be aligned with the client.”


The Aperture Approach


To that end, Aperture is building a fee model that aligns client outcomes with firm-wide revenue and manager compensation. “I don’t make any money unless the clients are making money,” Kraus said. “The managers get paid a small base salary, but they don’t make any real compensation unless they perform.”


Kraus then explored how the Aperture model affects the portfolio manager. Typically, he said firms and managers are incentivized to produce alpha, which means they emphasize capacity.


“Financial incentives drive managers to get big, and when they get big, they cannot perform at the same level,” he said. “It’s a fact. You lose performance — period.”


The Aperture fee structure changes that.


“Now the portfolio manager comes in, and I say, “What’s your capacity?’ and the math the portfolio manager does is, “Well, if I have $20 billion, I’m not going to perform, and I don’t get paid. But if I have 5 billion, and I can outperform by 5 percent, that’s a really attractive compensation because of the way the model works.”


Five percent of 5 billion, Kraus said, results in $250 million in alpha to the client. “The firm charges 30% of performance — that’s $75 million — and the portfolio management team earns $25 million,” he said. “That’s a very big number that should make any portfolio manager and team happy.”


Ultimately, Kraus said this model results in fewer managers who are managing less money — but it’s to the benefit of both clients and overall industry health.


“And I know, if you do the right thing for clients, you will win over time,” he said.


Note: Although the observations contained in this work represent the best thoughts of the individuals comprising the Nicsa panel, they do not necessarily reflect the views of Nicsa or any of its member organizations. Matters addressed in this work may touch upon legal or regulatory matters, however nothing herein is intended to be or should be construed as legal advice. You should contact your own counsel in order to obtain legal advice regarding these or any other matters.