Asset consultant Frontier Advisors has laid out what it believes constitutes a 'fair value' division of returns between investment managers and investors.
Writing in Frontier Advisors' The Frontier Line newsletter, senior consultant Leigh Gavin said investment managers are entitled to a fair share of the returns they generate from capital provided by superannuation members.
But since super members take the bulk of the risk, it is "quite reasonable" that they be allowed to keep a "commensurate share" of the returns.
"It has long seemed anomalous to us that managing tax leakage from net returns is considered prudent, but managing fee leakage from net returns is somehow considered by many to be overly frugal," Mr Leigh said.
"In 2016, Frontier will be drawing a line in the sand and defining what value for money means to us and what is a fair share of the economics between the investment manager and the investors providing the capital."
Products that Frontier looks at in 2016 – particularly in the the alternatives space – will not represent value for money if they display these three characteristics:
"The manager keeps more than a fair share of expected active returns above a common market benchmark (which includes the listed alternative eg. listed equities instead of private equity);
"The manager keeps more than a fair share of the expected total returns; and
"The manager keeps more than a fair share of the diversification benefit or the 'allocation alpha'."
"In addition, products should be able to lower the total funds management ratio; and manufacturers should include innovative features that may, for example, allow fees to reduce when the feature 'kicks in'."
"We feel the time has come to draw a line in the sand and state that, going forward, a product must satisfy at least one of these tests," Mr Leigh said.
"If it does not, we cannot give it an investment grade rating and cannot recommend it to clients."
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