The compensation of mutual fund managers has been less the subject of solid reporting than speculation—one sees averages in online sources from just under $100k a year to many millions. Over the years, despite public calls for greater transparency in the pay managers charge to the millions of Americans invested in mutual funds, onlookers still have very little clarity about their compensation. In 2018, researchers in The Review of Financial Studies could rightly say, "Little is known about the nature of the compensation contract between owners (firms) and managers, and even less is known about the actual compensation managers earn."
Now, thanks to the dogged efforts of researchers combing through reams of Census data and other public records over the last decade, we are getting some answers. One of those behind this important work, Yuehua Tang, Ph.D., a professor and researcher in finance at the University of Florida, helps us with what the new numbers tell us and what they mean for everyday investors.
"Everyone is trusting the sector for managing their financial financial resources," Tang said, pointing to mutual funds as the "go-to vehicles" for American savings. "How they are compensated affects pretty much every household." But more than that, "they are big players and stockholders, so what they hold and the kind of corporate governance they support is important not only for households but the economy."
Below, we break down the findings of Tang and other researchers, giving you the best information on compensation in this crucial American industry. We also explain why mutual fund managers are often so secretive about their compensation.
Key Takeaways
- Mutual fund manager pay is difficult to discern since mutual fund disclosures are often vague, but also because they are also paid by the advisory agencies the mutual funds use to manage the fund, which don't usually release such information.
- Most mutual fund managers get a base salary each year, plus other forms of compensation that bring them well beyond that.
- Compensation comes from a base salary, fulcrum fees, deferred compensation plans, equity and stock options, performance bonuses for the company and teams, and nonmonetary benefits.
- Among actively managed equity funds, only 6.5% of fund assets have fulcrum fees in place, which means performance-based compensation comes from elsewhere for mutual fund managers.
- The most comprehensive, recent study puts the most typical compensation at $2.04 million in 2024 dollars. However, there is a wide dispersion in the data, and a few earners collectively pull in much of the overall pay for mutual fund managers.
Understanding How Much Mutual Fund Managers Make
Time and again, especially when mutual funds in volatile markets have put up poor numbers, their managers' compensation has gained public attention, if not outrage. While private equity billionaires certainly draw public denunciation, they don't manage the funds in which much of middle America is invested. Half of all U.S. households have their money in mutual funds, which historically were meant to offer their managers pay that kept them away from riskier investments. In addition, U.S. laws and regulations provide incentives for many middle-income earners to funnel their retirement savings into mutual funds. As such, it's long been politically sensitive that an industry might pay exorbitantly for people to look after funds whose size, in the view of critics, results less from the effort and skill of their managers than the significant number of Americans pushed to invest in them.
Mutual fund management companies are paid a fee derived from a percentage of the fund's average assets under management (AUM). While you can check how much each fund management company makes as a percentage of the assets you put in (typically 1% to 3%), finding out how much of that is for compensating managers is far less easy.You can skim through a mutual fund prospectus, but there's no section to directly account for what fund managers are paid, whether it is for those who lead it and advise the firm or manage the portfolios. The Securities and Exchange Commission's (SEC) Statement of Additional Information offers investors and the public more detail, though that's still not much. Yet it stands to reason how much managers are paid directly relates to how much individual investors spend on fees. These costs can add up. Over time, compounding the interest from management fees means a sizable amount won't be there when someone has retired, though managers might say without their work, a lot more wouldn't be there, either.
Before discussing how much mutual fund managers make, we first need to look at the regulatory and legal background so we can detail the kinds of compensation managers are likely to see. Then, we'll be prepared to dive into the numbers and assess what that means for those investing in this important part of the financial sector.
Key Regulations
Mutual funds were intended to be the staid part of the investment fund business—the government bonds, if you will, to the tech stocks of hedge fund-type management. Where other fund managers could risk it all since their investors have high net worth and should know what they're getting into, mutual funds represent many Americans' retirement savings. These funds were to provide agreeable but not risky returns, and just as investors expect lower (but more predictable) returns that come with less risk, their managers were to do the same.
Hence, mutual funds were not supposed to pay their managers for performance, which might give them an incentive to bet on risky assets for outsized returns. The Investment Company Act of 1940 and the Investment Advisers Act of the same year dictate how mutual funds are organized. Section 205(a)(1) of this second law prohibits charging fees based on a share of the capital gains or appreciation of the fund managed. This is another way of saying the law doesn't allow performance fees.
But, as with many rules, there are exceptions. SEC Rule 205(3) under the Investment Advisers Act allows for performance-based pay in situations primarily involving high-net-worth individuals or institutional investors. This is why hedge funds and other high-end investment funds can offer their managers such outsized performance packages. Investors in them are generally considered more financially sophisticated, so they understand the risks of investing in funds with performance-based pay.
In simple terms, all this means a mutual fund manager can't get paid more just because the fund's value increases. This was all intended to lower the incentives for mutual fund managers to bet it all for the highest returns while playing with the retirement funds of middle America. By reducing the odds that fees for mutual funds were directly tied to fund performance, the SEC was looking to prevent excessive risk-taking that could harm retail investors who don't have deep pockets or extensive financial knowledge.
However, with the vast growth in mutual funds assets in the U.S. since the 1990s, mutual funds have become a massive industry, with about $25 trillion in assets as of early 2024, and now more than half of U.S. households invested in them.
Statement of Additional Information
In 2005, the SEC adopted a rule dryly called "Statement of Additional Information," which can make it seem like little more than footnotes to the main facts and figures mutual funds provide. Unlike the prospectus and other documents mutual funds must supply to investors, the statement is given to investors when they request it, which few mutual fund investors do. The SEC rules mandated that mutual funds now had to reveal in the statement how much they pay portfolio managers. Specifically, mutual funds must say whether the pay for their managers is fixed or varies and if it's influenced by the fund's performance or as a percentage of AUM. If their pay is linked to performance, the funds must set out the benchmarks they use to gauge their managers' effectiveness and the time frame used to assess it.
Qualitative Information
Yet many mutual funds release "qualitative information," meaning they don't give raw numbers. Instead, they say whether bonuses are more or less than base salary or a significant part of total compensation. You'll be forgiven for not finding this the most transparent way for mutual fund investors—many of whom use mutual funds precisely because these were set up for nonprofessional investors—to get this information.
In addition, as Tang pointed out, there are many regulations concerning mutual funds. For the advisory fee arrangement between investors and the fund management company, "there's quite a bit of transparency" for investors, he said. This is what's covered by the SEC rules. "But the organizational structures of the fund management company," though, "are quite complex." "Now the black box," he said, "is within the fund management companies or fund advisors." Portfolio managers are the employees of private advisory firms that mutual funds contract with, and the employment contracts between advisors and portfolio managers are anything but transparent. Thus, while the structure of how portfolio managers are paid must be described for the fund's investors, the dollar amount is shielded from public view.
Breakdown of Typical Compensation Package
A unique feature of the mutual fund industry, Tang pointed out, is that individual fund managers do not directly work for the fund investors. Instead, investors delegate their portfolio management to fund advisors, who in turn hire individual portfolio managers to make the daily investment decisions. The existence of this double-layer delegation introduces complex dynamics for the managerial incentives in the mutual fund industry.He's continuing work with colleagues to lay out these different incentives.
Base Salary
This is a fixed annual salary, not directly tied to the fund's performance or the amount of assets under management. It provides a stable income, whatever the market conditions. This is also the information sorted by Glassdoor, salary.com, and the Bureau of Labor Statistics, among many others, into the salaries portfolio managers at all kinds of funds, banks, and other financial institutions.
For example, as of early 2024, Salary.com reported a portfolio manager's annual base salary as ranging from $99,730 (for someone with under two years of experience) to $139,870 (for someone at the senior level). Leaving aside the fact that Salary.com uses a proprietary formula for deriving compensation that's hard to verify from the outside, this would include all portfolio managers, not just those at mutual funds.
Fulcrum vs. Performance Fees
Hedge fund and private investment managers earn performance fees when their funds beat certain benchmarks or preset targets. It's a direct reward for exceptional performance. However, such performance fees are supposed to be largely foreign to the mutual fund industry. Enter fulcrum fees. In this setup, manager pay adapts to how the fund performs compared with a benchmark. About 71% of mutual funds have a benchmark that is a peer fund, with 29% using others. If the fund outperforms its benchmark, the management fee increases, which can indirectly benefit the manager, either through increased earnings for the fund management company or through a bonus that takes these fees into account. Thus, the law allows what the SEC calls "symmetric" or fulcrum fees, but not asymmetric performance fees.
These fulcrum fees would seem to be where we should find the greater part of the compensation for mutual fund managers. According to data reported byThe Financial Times in 2023, that's not the case: among actively managed equity funds, only 6.5% of fund assets have fulcrum fees in place, down from 16% five years before.
Profit Sharing
So, if that's not where managers make their money, where is it from? Profit-sharing in mutual funds, as in any firm, is based on at least some of the following:
- The fund's overall profit: The most obvious criterion is the profitability of the fund or funds managed. This can be measured using total AUM, the fund's performance relative to its benchmark, and the fees generated by the fund.
- Individual performance: At least ostensibly, this is not the performance-based pay past legislation and regulations were meant to curtail, but it could include metrics related to client satisfaction, contributions to the release of new products or into new markets, and success in gaining new clients. For fund managers, their fund's performance relative to its benchmark is key.
- Role and seniority: Higher-ranking employees or those with more responsibility—charged with larger or more important funds—typically receive a greater share of the profit-sharing pool.
- Team, division, and company performance: In some cases, the performance of the specific team or division within the fund management company, as well as the company as a whole, affords more in compensation. If a particular team or division has done exceptionally well, the manager might receive a larger share of the profit-sharing pool. If the company does well, a larger profit-sharing pool is also available to distribute.
Other Types of Compensation
Beyond the standard salary and bonuses, mutual fund managers have other means of compensation. These can significantly boost their income beyond their fulcrum fees and profit-sharing.
Deferred compensation plans: These let mutual fund managers defer some of their income to a later date, often with tax benefits.
Equity stake and stock options: For those in publicly traded fund managers, stock options and an equity stake are particularly lucrative, especially if the company's stock value increases.
Nonmonetary benefits: These can include health insurance, life insurance, disability insurance, paid vacation, professional development opportunities, and other perks that add value to your overall compensation package. There is also the use of company jets, cars, and so on, for some managers.
Mutual Fund Manager Pay: What the Research Says
In the years since the 2018 Review of Financial Studies article that said too little was known about mutual fund managers' compensation, the picture has become far clearer. We can now say quite a bit more about their compensation and, perhaps more importantly, how it's derived. These newer studies, Tang said, are based on painstakingly putting together details from thousands of filings to the SEC, as well as anonymized data from the U.S. Census Bureau and Internal Revenue Service, not unreliable self-reported data, as found in some news sources over the years.
Pay as a Percentage of AUM or Performance?
Does the old view hold that mutual fund managers collect their pay as a percentage of AUM while their hedge fund cousins are paid on performance? Are mutual fund managers making inflated salaries, no matter what happens to their portfolios? In short, are mutual fund managers paid for their skill investing?
Tang and his co-researchers, Jianqiu Bai, Linlin Ma, and Kevin Mullally, used data from the U.S. Census Bureau, SEC filings, and other public records covering 2,300 mutual fund portfolio managers from 1991-2020 (an earlier study by the team gathered information on 4,500 mutual fund managers), puts the average portfolio manager's compensation at $1.76 million in 2020 dollars, a figure which would be $2.09 million in early 2024.
However, the story doesn't end there. The research also uncovers a significant variation in the pay of mutual fund portfolio managers, reporting a standard deviation of $3.26 million ($3.88 million in early 2024). Standard deviation is a statistical measure that tells us how spread out numbers are in a data set. Here, the high standard deviation means that the earnings are not clustered tightly around the average but are spread out over a wide range. This distribution differs from more evenly distributed earnings, such as those for northern European mutual fund managers.
Perhaps the most striking finding in the study is that relatively few portfolio managers are throwing off the average. Previously, mutual fund pay was not that interesting compared with hedge funds and other managers. "These days, with their growth in assets," Tang said, "they are very profitable," noting that many people might presume that if you're an advisor or manager at a mutual fund, you must be taking home millions. But "there's a huge dispersion in terms of the income" of mutual fund managers, he said.
The top 14% of the mutual fund portfolio managers accounted for about 66% of the total compensation.
This could reflect different pay scales for the different sizes of the funds managed, the success of their investment strategies, or their industry experience and reputation. But it could also reflect performance. The study found that mutual fund manager pay increases if a portfolio manager does well and has higher-than-average returns. For example, if their investments perform 1% better than expected over the past three, five, or 10 years, their pay goes up by 5.3%, 7.8%, and 10.3%, respectively. This could show a significant connection between how portfolios are managed and what they earn.
But Tang also said their research showed that higher-than-average returns meant more compensation, but the opposite didn't prove true. "They don't get penalized if they underperform," he said.
As such, the study suggests it's about the amount of assets they bring in, which is how fund performance impacts portfolio managers’ compensation. That is, portfolio managers who perform well attract more capital into the funds they manage. This is a positive outcome for those who manage these funds and, as a result, these portfolio managers receive higher compensation.
Pay for Performance Model
So, why are mutual fund managers paid this way? This "pay-for-performance" model should cause them to do what incentives should in many economic models: produce more or at least grow the amount of assets managed. Knowing that their earnings are directly tied to this could benefit those who put their money into mutual funds expecting healthy returns.
However, the authors of past SEC regulations and those behind the 1940 laws could point out that this model can have negative consequences. Since higher returns can come with higher risks, portfolio managers could be tempted to make riskier investments to boost their performance and, in turn, their pay. This could lead to situations where the interests of portfolio managers and investors are not aligned, especially in markets where the S&P 500 and mainstream investments aren't as bullish as they've mostly been for some time in the U.S.
For this situation to change, Tang said, "Regulations would have to change to get this disclosed. Portfolio manager compensation disclosure is unlike that for executives of publicly traded companies. In the latter case, their compensation is disclosed in a very detailed way."
Tang then noted other reasons that mutual fund management pay should interest us beyond how they affect mutual fund fees. Up next is research he is finishing, along with others, that gives a picture of the gender and racial makeup of mutual fund managers. Given their outsized impact on the American economy through the assets they choose, the backgrounds of those in these positions could prove as crucial as how much they make and why.
What Are the Risks in Investing in a Mutual Fund?
While mutual funds are managed by professionals and offer diversification, they have several risks. There's market risk: the value of a mutual fund can decline in line with changes in the market. If the market goes down, so do many mutual funds. There are also interest rate and credit risks for bond funds. Some funds may also invest in less liquid assets, making it harder for the fund to sell when needed. There's also managerial risk since the fund's performance depends on the expertise and decisions of the fund's management team.
Do Fund Managers Beat the Market?
The minimum goal of active mutual funds is to beat their chosen benchmark. They must do this to justify their fees and convince investors not to invest in a much cheaper tracker fund. However, most fail to achieve this minimum requirement regularly. Over the past decade, less than 7% of U.S. active equity funds reportedly beat the market.
How Hard Is It To Become a Mutual Fund Manager?
Becoming a mutual fund manager isn’t something that generally happens quickly. In terms of education, a relevant college degree and professional credentials such as the chartered financial analystdesignation are desirable. Work experience is even more important. Before taking the reins, the prospective manager must know the job well and be capable of managing millions or billions of dollars of clients’ funds. In short, becoming a mutual fund manager requires a lot of patience and commitment and experience.
The Bottom Line
Mutual fund portfolio manager compensation comes from a mix of a base salary, fulcrum fees, deferred compensation plans, equity and stock options, performance bonuses for the company and teams, and nonmonetary benefits. Among actively managed equity funds, only 6.5% of fund assets have fulcrum fees in place, which means performance-based compensation comes from elsewhere for mutual fund managers.
Generally, the mutual fund industry is tight-lipped about executive and managerial compensation. While the average manager's pay has been pegged by researchers at about $1.74 million, the broader context is a field marked by significant income disparities and driven by performance and fund success, with relatively few earners pulling in a good deal of the overall pay in this sector.
