In its 2019 Investment Management Outlook, Deloitte notes that a new pricing model for passive funds has emerged: free.
“The announcement of a no-fee fund was a seismic shift for the industry. With other investment managers also following suit with the launch of zero-commission platforms, firms’ revenue-generation focus now moves toward securities lending, order-flow payments, and shareholder servicing fees,” the report said.
“Larger investment managers will likely also use these zero-fee products to sell other offerings and keep investors within the fund family.”
Active funds are also seeing resurgence of a pricing model. Deloitte highlighted the ‘fulcrum model’, which links fees to fund performance and charges a base fee if the fund does not outperform its benchmark. If the fund achieves alpha, an additional performance fee is charged.
“Such variable fee structures may create a win-win situation, delivering better net returns to investors and incentivizing fund managers on performance,” the report explained.
Allianz Global Investors has been one of the early adopters of a performance-based fee model in the UK. Investors are charged a base fee of 20 bps and an outperformance fee of 20 percent on the performance over the benchmark.
Fulcrum fees for new active funds is one of Deloitte’s top predictions for the investment management industry in 2019.
“A couple of investment managers have adopted the “fulcrum fee” model, in which the investment manager is rewarded for generating alpha. This trend could accelerate with more than 10 firms adopting this pricing approach in the next 12–18 months,” the report said.
Deloitte’s predictions of greater innovation in the pricing models of investment managers comes as the Australian superannuation industry faces increasing scrutiny over fees.
The Productivity Commission’s report into the $2.7 trillion sector, released last week, pointed to significant evidence of “excessive and unwarranted fees in the super system”.
A key concern highlighted in the report is the impact that insurance premiums and fees can have in eroding member balances. It found that Australians pay over $30 billion a year in fees on their super, excluding insurance premiums.
