Asset owners continue to apply pressure on external manager fees, with new data from investment consulting house bfinance showing substantial fee reductions across a number of asset classes. Figures are based on real fees being quoted by asset managers for real mandates – not surveys or “rack rates”, which tend to be inflated. This fee compression is driven by factors including the rise of cheaper competitors, increasing transparency on costs, and expansion of the manager universe.
bfinance’s report, Investment Management Fees: Is Competition Working?, also shows that price competition in asset management is relatively inefficient, and investors can use a range of tools to improve value for money. Above all, investors should not focus on “low cost” at all costs; net returns are the priority, the study pointed out.
Mal Hunt, managing director and head of portfolio solutions at bfinance, said: “Falling fees – in particular asset classes – can represent a potential opportunity to re-evaluate spending for investors who appointed managers several years ago.” He noted that improving value for money continues to be a huge priority among pension funds and other asset owners that bfinance works with. “We have seen a big increase in demand over the last year for more granular, tailored fee benchmarking from investors that are looking to understand whether they’re actually getting value for money and, where relevant, renegotiate fees or replace managers,” he explained.
Hunt explained that it is crucial not to analyse costs at an overly superficial level and instead consider the whole picture including hidden costs, performance attribution, the overall leakage in complex fee structures and more. “It is also crucial to remember that long-term net return, not cash spent, is the most important metric.”
Kathryn Saklatvala, head of investment content, added that these fee reductions are driven by a range of factors depending on the asset class, such as an expanding manager universe, a reduction in return expectations, the development of cheaper alternative products or improving visibility on costs. Yet there are still significant barriers to price competition across the asset management industry, such as a lack of visibility on actual fees or total costs, or the reality that manager selection methods may not facilitate and maximise competition on pricing. “While there are some interesting developments taking place, such as the Cost Transparency Initiative in the UK, investors will only benefit if the data is sufficiently granular and specific.”