How Much Should Investors Pay for Active Management? Utility-Based Pricing for a Personalized Portfolio Future

As the asset management industry evolves toward greater personalization and transparency, investors will demand clearer frameworks for determining the value of active management. The authors develop a utility-based method to measure the rational willingness to pay for active management, starting from a standard 60/40 equity–bond portfolio. Their analysis of 1,203 active US equity funds finds that only 12% of managers increase investors’ utility. Of those funds, investors should be willing to pay, on average, only 19 basis points for active management, far less than headline alpha estimates suggest. The willingness to pay for active bond funds that increase investor utility is, on average, 11 basis points. These findings imply that traditional alpha measures overstate the value of active management and that a utility-based pricing framework can support more rational, investor-centered fee negotiations in the future. The authors discuss how this framework can help practitioners, regulators, and clients navigate the future of personalized and cost-sensitive portfolio management.