Investment Management Fees

Is Competition Working?

Investment Management Fees Research Study

This biennial report showcases a selection of areas where investment management fees have declined significantly, which in 2019 include absolute return bonds, emerging market equity, emerging market debt and fund of hedge funds. It also highlights sectors that have experienced less movement on fee levels, exploring the different dynamics. New asset classes included for the first time include China A-Shares. Data is based on real pricing offered by managers for real mandates – not surveys or ‘rack rates’.

This year’s edition asks: Is Competition Working? Why are fund manager fees falling in certain asset classes yet remaining resilient in others? In addition to fee trends, it also explores a range of tools that investors can wield when seeking to improve value for money, including mandate consolidation, performance deconstruction, hidden cost analysis and alternative fee structures (Part Two: Obtaining Better Terms). Investors are increasingly finding ways to re-frame the contest between providers, becoming ‘price-makers’ rather than ‘price-takers’.

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More about Management Fees

Investment management fees and other associated costs are crucial to successful portfolio outcomes. While net performance (or “value for money”) should never be overlooked in the pursuit of savings, every penny saved is a penny earned – and compounded for years to come.

A selection of other publications about investment management fees can be accessed on this page. Further insights on fees within equities, fixed income, private markets and diversifying strategies are available below, along, as well as a brief round-up of strategies that investors may use for obtaining better terms.

Working with clients

  • Supporting asset owners in obtaining better fees and terms from asset managers has always been at the heart of bfinance’s mission.
  • Manager selection processes are explicitly designed to maximise price competition and provide investors with the strongest possible negotiating position.
  • Fee review services provide high-quality, granular benchmarking of existing manager fees and renegotiation support.
  • Publications offer proprietary fee data, with the aim of improving transparency and assisting asset owners beyond our clientele in obtaining better terms.

What drives investment management fees?

Investors continue to seek better fees and terms. But the buyer’s desire to pay less is not – in itself – a sufficient condition to produce a downward trend across an asset class or strategy. Pricing depends on a number of variables, including (but certainly not limited to): visibility and comparability of fees or total costs for a strategy, ease of ascertaining quality, sector maturity, strategy profitability, overall investor demand, and whether the prevalent manager selection methods facilitate price competition.

There are additional factors in play for specific institutional investors and asset managers. For example, a firm seeking to enter/grow a new strategy or gain credibility with a certain type of client may be willing to subsidise lower pricing for that strategy or client type.

Have Investment Manager Fees Increased or Decreased in the last 3 years

Getting better terms

Investors seeking to obtain the best possible value for money can employ a number of techniques and tools. Some of the most pertinent are listed here.

1) Keep up to date with pricing trends

Certain strategies and sectors can demonstrate considerable movement in asset manager fees, costs and terms over particular periods while others remain more stable. Strong insight into these dynamics can facilitate either renegotiation or a change in provider. We note particularly significant fee reductions over the last five years in:

  • Fund of hedge funds
  • Absolute return fixed income
  • Emerging market debt
  • Emerging market equities
  • Private debt

Fee reductions are also evident in other sectors (contact for more information about the latest data on fees).

2) Ensure that benchmarking is (a) granular and (b) reflects real pricing

Many investors seek to benchmark the fees paid to a fund’s existing managers against appropriate comparators. It is crucial to ensure that these exercises are appropriately granular, such that the managers are being compared against relevant peers (e.g. comparable strategy, performance, risk exposures) rather than broad asset class averages. It is also essential that underlying data is based on the pricing that managers may provide to a similar client, not inflated “rack rates.” Click here to read about bfinance fee reviews.

3) Consolidate (with care)

Larger mandates can help investors in obtaining lower fees. Yet tiering does not work in the same way across all asset classes and strategies. Certain sub-sectors provide much greater “scale benefits” than others. The average thresholds where tiering begins and ends also differ by sector. More detail can be found in the 2019 bfinance fee study. Investors must also weigh the potential trade-offs involved in consolidation, such as reduced diversification.

4) Analyse risk factor exposures

The last few years have seen considerable advances in the risk analytics that can be applied to managers’ portfolios in order to determine their exposure to underlying risk premia. These analytical tools can help to improve diversification, enhance risk-adjusted returns and bolster risk management. Yet they can also be useful in fee negotiations. An understanding of “true alpha” (outperformance versus a tailored benchmark reflecting style exposures) can help to ensure that an investor is not over-paying for performance.

5) Consider fee structures

Fund Manager Fees

Investors should consider all aspects of fees: management fees, performance fees, hurdles, catch-ups, and – in illiquid strategies – whether fees are being paid on invested or committed capital. All aspects are significant and should be viewed in combination. A number of high-profile firms (consultants and asset managers) have advocated greater use of performance-based fees or performance-related fees (PRF). When designed and governed carefully, they can be helpful. Yet they can also create new alignment problems. Where an investor wishes to use performance fees it is worth considering a selective approach, with particular asset classes where they may be most beneficial.

6) Examine total external manager costs (including “hidden costs”)

Costs for external investment managers fall into three categories: those that are visible and known (e.g. management fees), those that are visible but hard to estimate/model, and those that are essentially invisible to the investor since they are netted out before “gross” returns. Transaction cost analysis can be helpful in addressing hidden costs in liquid market strategies. Private market investments are particularly problematic in terms of “non-fee” leakage, but this problem can often be reduced through careful manager selection and close scrutiny. These overall costs should be considered alongside fees in order to generate a clear picture.

7) Consider co-investments and other alternative implementation models

Although fees have not declined significantly in certain illiquid asset classes such as private equity, investors have achieved notable cost reductions by channelling a greater portion of asset outside conventional fund structures or SMAs. This includes classic co-investments, deal-by-deal co-investments (e.g. fundless sponsors), direct investments and more. There is a lack of transparency on the subject of co-investment: managers typically do not disclose how much they deliver, which LPs receive it, who gets preference.

Encouraging competition

Price competition is somewhat limited in asset management – particularly in certain sub-sectors – compared to other industries. The lack of transparency and comparability of total costs, coupled with the difficulty of ascertaining quality, can inhibit competition. Yet investors can create and drive price competition when selecting providers. Helpful principles include:

  • Involve a broad universe of providers, not a restrictive group of “recommended” firms;
  • Seek clarity and comparability on total expenses and cost structures;
  • Provide transparency to managers as early as possible (managers often will not realise that they are in the top quartile on fees until they are informed, particularly in sectors where pricing is less well understood);
  • Pursue early conversations on price (do not leave the issue of price until “finalist” stage);
  • Collaborate with peers where group negotiation is appropriate.

bfinance seeks to employ these principles in day-to-day management of manager search and selection. Yet the same simple tenets can be used by any pension fund, endowment or other asset owner, whether they handle processes in-house or work with advisors.