New research from bfinance has found that this scrutiny has been met with a fall in fund management fees as investors look to cut costs, aided by new, cheaper products that are increasing competition.
Our research has found that fees have fallen in several sectors globally and it’s not just the pressure from regulators that is driving the decline. The low interest rate environment is also spurring investors to pull vendors back to the negotiating table as they look for cost savings to drive returns.
Investors are increasingly reluctant to pay inflated fees for betas dressed up as alpha, and many are embracing lower cost passive strategies or bringing functions in-house amid disappointment in the performance of active managers in the wake of the global financial crisis.
The findings come as large institutions in Australia and internationally continue to hit the headlines over asset management fees, either announcing cost cutting measures or defending their spending.
In April, it was the turn of the North Carolina Treasury, described by Bloomberg as “the US$90 billion investor out to fire Wall Street”; while in Australia, Future Fund chief investment officer Raphael Arndt outlined a “new approach” aimed at ensuring managers are only paid for “true stock-picking skill” rather than beta or factor-style bets.
What our research has shown is that fees are responding to a new dominant mindset among investors – and one that is shaping to be as important as net performance.
The mindset is that while returns are hard to predict, small cost reductions deliver guaranteed gains over the long-term, with every cent saved falling straight to the bottom line, to be compounded for years to come.
It is bfinance’s intention to encourage transparency and promote the interests of asset owners.
Fees fall but costs rise
Investors around the globe have engaged bfinance to review portfolios and ascertain where fee savings could and should be made.
The findings are telling: despite the downward pressure on fees in several sectors, investors are on average paying out a higher proportion of their assets under management in investment costs each year than they were a decade ago.
The reason behind this phenomenon is that higher allocations to pricier private markets have outweighed savings achieved elsewhere.
Fees and costs alone are never the most important metrics. We appreciate that more robust and diversified portfolios may deliver higher net performance despite greater expense. Yet it will take years if not decades to determine success.
In the meantime, achieving the greatest possible value for money remains a vital priority.
To apply continuing pressure on fees, we believe that a more open and competitive process incorporating the widest possible universe of managers can be helpful. We also recommend that clients renegotiate, reassess and reprioritise:
- Where significant price reductions have taken place, such as low volatility and smart beta, now may be the time to bring providers back to the negotiating table;
- If fees proved to be a crucial factor in investment strategy, such as the choice of single hedge funds versus fund of hedge funds, it may be worth it to reassess;
- Finally comes the question of priorities: stakeholders should always remember that, while asset allocation is always pre-eminent, implementation risk is increasingly critical to investor outcomes for today’s more illiquid and expensive portfolios.
Frithjof Vanzyp is the director of consulting firm bfinance.
