Paid to Breathe—Even When They Fail You: How to Spot the Exceptional Fund Manager

If you are looking for a manager to invest your capital, finding one you can trust is essential for your investment success. Beneath the polished presentations and glossy reports lies a fundamental conflict of interest. This conflict quietly eats away at your returns.

Imagine hiring a captain who refuses to board the ship he wants you to travel on. Or a chef who won’t taste his own food. That’s how much “skin in the game” most asset managers have. They collect hefty fees regardless of how their portfolios perform. Rarely do they invest meaningful personal capital alongside their clients.

The result? Conflicts of interest that steer managers toward protecting their income instead of investing as well as possible for you.

Understanding the Importance of Ownership

Before entering investment management, I spent over a decade as a consultant and business owner. Across various industries and countries, one lesson stood out: people make better decisions when they think and act like owners. They must be exposed to both the upside of success and the downside of failure. Alignment isn't optional; it sharpens focus, demands discipline, and ensures accountability. It separates thriving enterprises from stagnant ones.

Imagine my surprise when I discovered that almost no one managing investments in capital markets thinks like an owner. The industry runs on statistics and models based on false assumptions and misaligned incentives. All of this is detrimental to clients.

When I researched investment firms in Switzerland to join, only a handful focused credibly on business fundamentals. I joined the one I admired most.

After six years of advising pension funds, insurers, and private banks there, I spoke to hundreds of prospects and clients. Only four ever asked the most important question: “How have you invested your own money?” A question that is usually answered vaguely, if at all.

Later, as a member of our investment committee, I experienced the problem firsthand.

The Moment It Hit Me

With time and experience, I was promoted to our investment committee responsible for all our investments and strategies. Our approach was to invest in high-quality businesses at attractive valuations, and we did that in a disciplined manner.

However, on a few occasions, I felt our decisions could turn out disadvantageous for our clients. Whenever possible, I convinced the investment committee with reason. But in one instance, I had to intervene.

We had invested in Apple, a decision I supported because I saw it as a gem. Apple had revolutionized communication, computing, media, and entertainment. It boasted industry-leading consumer loyalty, high switching costs, enviable retail channels, and ample cash reserves. The stock was undervalued given its many competitive advantages.

But nearly a year after Steve Jobs' death, Apple's shares started tanking. In our monthly meetings, the committee pushed to sell, but I argued to hold, citing its rock-solid business traits. I also personally bought shares with my own savings.

The stock continued to drop and nearly halved within six months. In my view, Apple had become a steal. The committee, however, was determined to sell, leaving me with no choice but to veto a decision I was convinced would harm our clients’ investments.

Visibly irritated by my veto, I was summoned to explain why I wasn’t being a team player. Laying out why Apple was an exceptionally strong business with a bright future, I asked, "Imagine you owned Apple privately. If I offered to buy the company at today's price, would you thank me—or view my offer as an insult and tell me to leave?"

When I was told that Apple was not a private business and its stock could fall more, I was puzzled. This argument could apply to any stock we held. It didn’t explain why we should sell Apple, especially given its low stock price. Then it hit me like a rock!

The Incentive Trap

It wasn’t my reasoning, communication, or the fact that I wasn’t being understood. Management fees are essentially paid to breathe—as long as clients stay!

Most managers earn a fixed fee—typically 1–2% of assets—regardless of performance. On the surface, this seems aligned; after all, if they perform well, the assets they manage grow, and so do their fees. But dig deeper, and the incentives reveal a trap.

Superior returns require deviation from the crowd. This means buying undervalued assets when others flee or are uninterested. Yet, for managers, the upside of such differentiation is capped. If proven right, they get praise and modest fee growth. But if they’re wrong—even temporarily—clients withdraw their capital, and managers lose lucrative management fees.

This creates a subtle but critical conflict of interest. When push comes to shove, managers who do not eat their own cooking tend to choose what’s in their best interest. Without personal stakes on the line, decisions skew toward self-preservation rather than bold, value-driven choices for clients.

This conflict is subtle because incentives shape behavior subconsciously and easily cloud judgment. Managers often convince themselves they’re protecting clients’ interests when they really are protecting their own. As Richard Feynman warned: “The first principle is that you must not fool yourself, and you are the easiest person to fool.”

By holding dozens, if not hundreds, of investments and going with the crowd instead of against it when it counts, the vast majority of managers create a clever illusion. They appear active enough to justify active fees, yet close enough to the index they are compared to, to avoid underperforming it strongly—a phenomenon called “index hugging.”

The result of only pretending to invest actively is damning. Before fees and costs, the average active manager performs similarly to their benchmark. After fees and costs, over 80% underperform their benchmarks over time according to S&P Global SPIVA. This leaves investors with subpar returns.

How You Can Protect Yourself

Look for managers who have the conviction to put their money where they are asking you to put yours. It should be a substantial portion of their wealth. If it’s not good enough for them, why should it be good for you?

Insist on fee structures tied to outcomes. Ideally, there should be no management fees, only sharing in profits above a meaningful hurdle rate, with losses carried forward.

These measures ensure accountability and shift the dynamic from extraction to partnership.

True investors act like business owners, not traders. Great investments are rare and often unpopular or underestimated. Solo decision-makers often outperform committees because they are more likely to invest differently. They buy and hold a few—less than 20—exceptional businesses at attractive valuations. They let time and compounding do the work because they understand that time and fortune favor great businesses.

The Payoff

Does this guarantee above-average returns? No, but it dramatically improves your odds by eliminating flawed incentives that hinder your success.

This isn't about chasing hot tips, finding famous or exclusive managers, or timing markets. It’s about aligned, rational, long-term compounding that focuses on business ownership and turns market volatility into opportunity.

By embracing these principles, you reject conflicted models, reclaim your agency, and form a true partnership where success is earned, not extracted.

Is your manager's skin truly in the game? Are their rewards linked to your victories, and do they also suffer if their decisions harm you? If not, it is time to seek a manager who is. Your wealth—and the life it enables—deserves nothing less.

Bahram Assadollahzadeh, CFA

November 12th, 2025

Paid to Breathe—Even When They Fail You_ How to Spot the Exceptional Fund Manager and Prot.

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