Too many active money managers are managing too much money today, and investors are paying the price, AB Chairman and CEO Peter Kraus said Monday.
Open architecture — the option that allows a firm's clients to invest in investment vehicles offered by competitors — has created too many options, he said. Now, clients chase after managers who have outperformed over three- to five-year windows, he said.
The problem is they consistently buy into managers when their hot streak is about to turn cool.
"We know by looking at the numbers that, in fact, people sell at the wrong time and buy at the wrong time, and that costs them on average between 1.5 percent to 2 percent a year, which is a huge expense," Kraus told CNBC's "Squawk Box."
Many money managers are managing too much money to produce sufficient returns, Kraus said. The solution is to determine how much money a manager can manage effectively and impose capacity constraints, he said.
"Knowing that point is not easy, but I believe that that's what managers have to do. They have to do it more consistently," he said.
"Every manager has a different capacity constraint because every manager's philosophy and construction is different," he added.
Firms should be hiring a set of active managers who are complementary and specialize in different areas, according to Kraus. Those individual managers should be persistent, have strong processes, be subject to capacity constraints and have high conviction in their strategies to avoid diluting gains by over-diversifying, he said.