The Ethics of Spending Your Investors’ Money

In investing, costs matter. But so does context – and so should conscience.

Multi-managers face constant trade-offs. The first is how much absolute risk (volatility) they’re prepared to carry in pursuit of return. The second is the extent to which they’re willing to stray from a benchmark and accept more variable returns, in exchange for the potential of active outperformance. But the third, often overlooked, is cost: how much of the investor’s money should be spent on underlying managers, and to what end?

This is where ethics enters the equation. Because every time a multi-manager selects an active fund over a passive one – and vice versa – they are, in effect, spending the investor’s money. If the more expensive choice doesn’t deliver enough additional value, the investor is worse off. And if the decision was made to make the portfolio look more attractive by being cheaper, rather than perform better, the lines get blurred.

Cheaper isn’t always better, that much is well understood. But targeting a specific fee outcome, like a low Total Investment Charge (TIC), simply to gain commercial appeal, introduces a different kind of tension. It shifts the centre of gravity away from investor outcomes and towards product positioning. And that’s a problem.

The only truly defensible anchor point – ethically and practically – is this: every underlying decision should aim to maximise the expected net outcome for the investor. Not gross returns, not headline costs, but actual, after-all-fees results.

If the most likely way to deliver that is through a lower-cost passive option, then that’s the right choice. But if a more expensive active manager is expected to outperform net of fees – or contribute meaningfully to portfolio resilience – then excluding it simply to hit a lower TIC creates misalignment between manager and investor. That’s no longer cost consciousness; it’s a business decision that could come at the investor’s expense.

Of course, some mandates are explicit. They prescribe the blend between active and passive for strategic reasons or set a specific fee ceiling. In those cases, the job is to act within the boundaries and to apply the same reasoning, expertise and judgement in navigating the trade-offs as well as possible. Where any discretion exists, the obligation is clear: choose what’s expected to serve the investor best, even if it makes the proposition a harder sell in the short term.

This is where it gets ethically uncomfortable. Not all firms are equipped, willing or able to pursue a more expensive strategy based on consistency through quality. That path is harder. It demands investment in people, process, systems, and governance. It requires the courage to ignore commercial temptations. The easier route is cost leadership – a leaner proposition, easier to market, with fewer demands on skill or infrastructure.

But let’s be clear: a cheaper portfolio will always look better on a factsheet. It only benefits the investor if the alternative choices would otherwise have underperformed after all fees. That’s a high bar – and one that should be cleared deliberately, not by default.

At PortfolioMetrix, we don’t target a specific TIC. We target better investor outcomes. The TIC is a function and outcome of the blend, not the reason for it. In every decision, we ask: is this the best use of the investor’s money? If the answer is no – whether passive or active – we walk away. In practice, we achieve significant cost benefits from our scale, but that’s not what we’re optimising for – it’s a consequence.

It’s a simple test. And over time, it has served both our investors and our business well. Because a consistent track record, built net of all fees, speaks louder than any price tag.