The Hidden Defect in Active Managers

A fascinating study

A fascinating study explored the effect of narcissism on professional money management. The three authors were with the Institute of Accounting and Finance at the University of Marburg.

To determine the level of narcissism among fund managers, the researchers scoured social media (looking for those with longer LinkedIn profiles) and read transcripts of interviews published on the The Wall Street Transcript database. They followed standard psychological protocol to identify narcissistic traits, primarily by looking for managers who dominate their conversations with first person pronouns (I, me, my).

The findings of the study were quite stunning.

Fund managers with narcissistic personality traits were more likely to deviate from their defined investment style (as set forth in the prospectus for the fund). In fact, they were 41% more likely to engage in style drift.

Narcissistic fund managers had an average performance “virtually identical” to their non-narcissistic counterparts, but with significantly higher risk.

Narcissistic fund managers tended to manage larger funds, presumably to increase their compensation.

Prevalence of narcissism

The study noted the prevalence of narcissism among fund managers was higher than among CEO’s.

Firms headed by narcissistic CEO’s also pay a hefty price. CEO narcissism is associated with unethical behavior and failure to adhere to rules. Narcissistic CEOs are more frequently accused of fraud and engage in financial misreporting.

Practical implications

There are many implications of this study.

As part of your due diligence on an active fund manager, check out their LinkedIn profile. Does it seem excessively self-promoting?

Access The Wall Street Transcript database and Google the fund manager. Look for interviews. If you find any, read them with the goal of determining if they demonstrate evidence of a narcissistic personality.

Don’t stop with fund managers. You don’t want clients who exhibit these traits either. Read their social media postings and whatever else you can find out about them online. There’s often a treasure trove of information waiting to be uncovered.

Follow the same protocol with colleagues and new hires. Having a narcissist in your midst is unlikely to foster a positive culture at your firm.

Finally, look within. Is it all about you? Are you genuinely interested in your colleagues, employees, prospects, and clients? Can you set your personal agenda aside and focus on others?

Most firms have a strict “no smoking” policy.

Maybe it’s time to adopt a “no narcissists” rule internally, before retaining clients, and prior to recommending an actively managed mutual fund.

Dan trains executives and employees in the lessons based on the research on his latest book, Ask: How to Relate to Anyone. His online course, Ask: Increase Your Sales. Deepen Your Relationships, is currently available.

Read more articles by Dan Solin