Superannuation funds and their asset consultants are increasing the pressure on investment managers to revise their fees in a way that will lead to managers taking on more of the risks of underperformance.
Frontier Investment Consulting, which is owned by AustralianSuper, Cbus, First Super and HESTA, has been encouraging its clients to push for improved fee structures.
"We have had clients who are simply walking away from some current arrangements [or] trying to renegotiate arrangements," Frontier managing director Fiona Trafford-Walker said.
"[And] when they put in new managers they have some very strict criteria about the kind of fee structures that they are prepared to accept."
Frontier, which has $116 billion in funds under advice, has been pushing for managers to put performance fee arrangements in place.
"The flat fee/performance fee option was our preferred option, but we are really at a bigger picture level more concerned with better fee structures or improved fee structures that align interests of the managers with the clients," Trafford-Walker said.
"[Clients are] much more discerning about the net return or net value to members and investors, but also more around how much of the alpha they want to share with the managers.
"There is just a little bit too much wealth transfer at the moment from the members to managers, I think."
She said she expected the ongoing consolidation in the superannuation fund industry would result in funds driving the fee negotiations harder than in the past.
"The other pressure on the funds management community is the number of clients," she said.
"You've got the number of possible clients shrinking all the time and the mandates are getting larger and larger, so why would those big funds want to pay standard fees? They will want to negotiate much better fee structures than they have now," she said.
Asset Super chief executive John Paul confirmed his fund regarded investment fees as one of the primary sources of inefficiency.
"I'm just gobsmacked that investment managers sit there and put their hand out and take a percentage of the money under management and, quite frankly, whether the investment manager that you've put your money with achieves their aim or doesn't, they still take their fee," Paul said.
Addressing investment management fees together with the benefits of SuperStream would do much more to reduce costs for members than the proposed MySuper reforms would, he said.
"I think [investment management fees] is the last bastion of cost that we've got to look at and it is not an easy one," he said.
"I think that the government is probably looking at the easier ones, which is 'let's structure a product, let's limit the bells and whistles and let's insist that they meet certain cost criteria', and I think that was an easy option."
One of the most contested fee structures is that of alternatives or hedge fund managers, where the two and 20 structure still has not been eradicated.
But more managers are looking at efficient structures to capture hedge fund returns.
Westpac-owned Advance has launched a new alternatives fund of fund that combines direct exposure to hedge fund managers with hedge replication strategies that captures hedge fund beta relatively cheaply.
"We would like to think that we've made strides forward in terms of fees and certainly fee efficiency," Advance head of investment solutions Patrick Farrell said.
A Deloitte report compiled for the Cooper review found super funds with more than $20 billion in assets under management could run a 10 per cent alternatives allocation in a 70/30 default fund at a cost of 89 basis points.
This figure has been widely criticised by alternative managers, but Farrell said depending on the structure of the exposure, that rate was not out of reach.
"If you were to combine all the alternative exposures, including alternative beta, which is like commodities and infrastructure, with an absolute return strategy-type skill set, or an alpha-seeking skill set, then I think the combination of those assets could probably get down to around 80 basis points," he said.
