Practical analysis for investment professionals
14 September 2017

Book Review: Empire of the Fund

Empire of the Fund: The Way We Save Now. 2016. William A. Birdthistle.

In 2003, ordinary retail investors confronted financial insiders’ legerdemain, which came at the expense of retail investors. The trickery consisted of late trading and market timing, two of several mutual fund afflictions that William Birdthistle lays bare in Empire of the Fund: The Way We Save Now. Yet, more than the book’s title, its subtitle — a play on Anthony Trollope’s 19th-century serialized novel The Way We Live Now, itself inspired by financial scandals of the 1870s — hints at widespread maladies in the present-day financial edifice. Part critique and exposé, part literary oeuvre, and (in large) part proscriptive and prescriptive guidebook, Empire of the Fund is a cautionary tale about the dangers of misaligned incentives and how the ordinary investor can navigate around them. It thus makes for both required and entertaining reading for the practitioner, the policymaker, and the regulator.

The book provides teachable moments as much for individual investors as for fund company grandees and policymakers. The tectonic shift away from defined benefit plans to a defined contribution world has at once empowered and enfeebled the individual investor, creating a propitious environment for the ascent of the mutual fund. Proceeding very much in the manner of a skilled physician, Birdthistle first examines the patient and describes the possible treatments. He then considers the merits and demerits of alternative therapies and concludes the book with suggested cures.

Much of what Empire of the Fund relates is, or should be, familiar to the practitioner. What differentiates it from many dry investment texts is its ability to deliver critical concepts with style and practicality, not talking down to the reader but, rather, offering a worthwhile and handy instruction manual for private wealth managers looking to better educate their clients on fund selection and portfolio allocation.

Chapters on the objectives, structure, and economics of mutual funds make clear that behind the benefits of professional management lies a complex latticework of interconnectedness between the asset management component and the ancillary service providers. At their core, mutual funds suffer from structural flaws and are riven with conflicts of interest. Fee levels, soft dollars, selective disclosure, misleading valuations, and trading boondoggles have all been part of the product’s history. Investors, beware.

To highlight the mutual fund’s many afflictions, Birdthistle adduces myriad examples from financial history, both recent and distant. The financial adviser, as much as the retail investor, needs to be wise to fund directors’ chicanery and propensity for abuse.

Although much of the book provides an engaging romp through history and compelling analyses, its final section proffers novel approaches to negotiating an obstacle-strewn path. Its proposals for change are at once provocative and instructive.

In Birdthistle’s view, the problem is as much with the customers as it is with the investment profession. Many citizens lack financial literacy and numeracy. People willingly pay for legal counsel and medical treatment, yet the financial services profession expects them to fend for themselves on the critical issue of retirement planning, a task for which most people are ill prepared.

Birdthistle suggests that licensing requirements for individual investors at the state or federal level could determine their fitness to invest and assume risk in a way that the completion of a risk tolerance questionnaire might not. (He recognizes that some will object to the government’s injecting itself in this way.) Such a preventive approach could, in theory, lessen the eventual burden of socialized losses that stem from investor ignorance.

Alternatives to existing industry structures could enable people of average means to benefit from economies of scale. The author’s proposal to permit nongovernment employees to participate in the US government’s Thrift Savings Plan (TSP), which enjoys an expense ratio of just under 3 bps, is worthy of consideration. In his final comments on regulatory lapses, Birdthistle suggests that better and more properly focused enforcement would be preferable to misdirected government lawsuits that accomplish little.

A graduate of Duke University and Harvard Law School, Birdthistle brings intellectual rigor and a legal perspective to his task. His narrative is a work to savor, affirming that finance is worthy of inspired use of the English language. Empire of the Fund embodies practicality with a literary overlay reminiscent of the work of the eminent financial analyst and commentator Jim Grant.

More book reviews are available on the CFA Institute website or in the CFA Institute Financial Analysts Journal®.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Marc L. Ross, CFA

Marc Ross, CFA, is an experienced investment professional with a varied skill set that encompasses third party manager research and due diligence, securities compliance, investment advisory, and ERISA qualified plan design, sales, and implementation. In addition to the CFA charter, Ross holds the CFP® and CLU designations.

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