By Our Own Petard

The investment industry has spent decades migrating from commission-based to fee-based to performance-based compensation structures, each marketed as a solution to misaligned incentives. Yet the gap between what we're told these structures accomplish and what they actually incentivize has never been wider. The vocabulary of alignment has become so seductive that we've stopped asking whether alignment itself is even achievable.

• The meme of alignment has become more profitable than alignment itself. Asset-based fees, equity ownership, performance incentives, each is sold with the same promise and each obscures a different hidden incentive. The industry knows this, which is why the salesmanship around compensation structures has become so elaborate.
• Even a manager with zero skill will extract performance fees from randomness alone. Monte Carlo analysis reveals that investors pay roughly 80% of a manager's annualized volatility in performance fees annually, regardless of actual alpha generation. In over half of scenarios, fees are collected despite negative returns.
• The true incentive in most structures isn't to outperform. It's to not upset you until your account can be sold. RIA principals considering exits have spreadsheets with your AUM multiplied by 10x. That number shapes behavior far more than any narrative about fiduciary duty or skin in the game.
• Compensation structures cannot solve principal-agent problems because the problem isn't structural, it's human. Every fee model creates perverse incentives. We've simply become expert at dressing them up in language that makes us feel better about what we're paying.
• The real question isn't how to better align incentives. It's whether we can stop believing we ever will, and act accordingly. Once we accept that true alignment is impossible, we might actually start making smarter choices about who we hire and what we demand of them.