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No One Ever Went Broke Betting Against The Intelligence Of Institutional Fund Managers, Barclays Edition

Fiduciary duty is no cure for idiocy.
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Wednesday was supposed to be a good day for Barclays. Chief Executive Jes Staley humbly apologized over his vigilante crusade against an anonymous whistleblower as the Board offered its absolution, capping off a bizarre and embarrassing spectacle for the bank. But before the mood could turn too positive, the Securities and Exchange Commission arrived and dumped a $97 million buzzkill on the party.

According to the settlement, Barclays has to shell out for overcharging clients across a range of services tied to its since-spun-off Wealth and Investment Management Americas unit. Amongst other shenanigans, the bank made $50 million by charging clients for a diligence and monitoring service it didn't perform, while it bilked others based on what amounted to sloppy math. But the most notable charge has to do with Barclays' sales of mutual funds to institutional clients, among them pension fund and nonprofit endowment managers:

[F]rom at least January 2010 through December 2015, Barclays Capital disadvantaged certain retirement plan and charitable organization brokerage customers (“Eligible Customers”) by recommending and selling them more expensive mutual fund share classes when less expensive share classes were available, without disclosing that Barclays Capital had a material conflict of interest, i.e., that it would receive greater compensation from the Eligible Customers’ purchases of the more expensive share classes. In addition, Barclays Capital did not disclose that the purchase of the more expensive share classes would negatively impact the overall return on the Eligible Customers’ investments, in light of the different fee structures for the different fund share classes.

In other words, Barclays had a duty to tell charities and retirement funds they could get a bulk discount on mutual funds, but failed to do so. This is inarguably bad behavior, and while hardlyunique, it is right and proper that those who were responsible Barclays shareholders have been held accountable.

But we can't help but ask about those the other side of these transactions: the institutional fund managers.

Imagine you were an institutional allocator who (at the risk of sounding redundant) knew nothing about managing other people's money. For the sake of argument, let's say your previous job experience is entirely in outhouse construction. You can't tell a 12b-1 from a hole in the ground. All you know about this new gig is that you're supposed to take this a pile of money and apportion it as cheaply as possible to people smarter and better-compensated than you.

The first thing you'd do is find a big name. Barclays works. Then you barter. As anyone who's ever bought anything in large quantities knows, it's worth inquiring about bulk discounts. You, the erstwhile outhouse contractor, saved a few bucks when you got urinals by the truckload. As you mention this, the sales guy suddenly remembers, oh yes, you don't have to pay that upfront Class A sales charge! How could I forget, silly me [grumble grumble].

Yet somehow this final step in the process, the part where the fiduciary does their fiduciary duty, evidently didn't take place. Note that the settlement doesn't accuse Barclays of lying about its funds, just failing to note the discount (a failure that apparently happened with 19 different eligible accounts). This doesn't look great for Barclays, of course, but neither does it look great for the unnamed fund managers who somehow made thus far in their careers without sacrificing their child-like ignorance about one of the most basic discounts in fund management.

Barclays to Pay $97 Million for Overcharging Clients [SEC]


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