Fee innovation needed ‘one way or another’

Investment management fees are currently “too high” and need to be rethought in order to better reflect both client needs and the work being done by the manager, according to Remerga.

The company cited recent research from UK-based consultancy firm LCP, which found the total cost of investment management has gone up in recent years despite lower fees being charged, owing to managers charging based on asset size.

“The common practice of charging management fees based on asset size is deeply entrenched in the industry but the practice does not take into consideration the time horizon of the investment,” said Remerga chief investment officer Craig Mercer.

“For an asset manager, the stability of the capital base is a valuable tool. It allows the manager to not only build a more sustainable business but, crucially, it allows for longer-term investment decisions. Current practice does not reward the longevity of committed capital.”

Mr Mercer said “the industry is in need of some fee innovation” and alternate fee structures that put the onus on longevity rather than size should be encouraged.

“Given the clear advantage that a long-term investment horizon offers, it would seem logical to encourage long-term capital commitments. Longevity of capital should be rewarded over and above size,” Mr Mercer said.

Remerga’s model would see the fees charged to investors gradually reduced the longer that investor’s funds remain under management, with these discounts applied based on the timing of individual cash flows to account for new investments from the same individual.

“The total applicable fee is the weighted average fee applicable to all the cash flows and their respective times of investment,” Mr Mercer said.

Mr Mercer said regulators look likely to impose changes themselves if the industry doesn’t act soon to improve management fee structures.

“The UK Financial Conduct Authority (FCA) is reviewing that country’s wealth management industry and has made some recommendations for changes to fee structures in its interim report,” Mr Mercer said.

“The FCA’s view is that industry margins are high, investors don’t get any scale benefits, some active managers are not really active and transaction costs are not transparent. One way or another, there will be change to the way fees are charged.”