Fund managers’ costs don’t rise with the market — but their fees do

Posted by Robin Powell on April 10, 2017

 

Whichever asset manager it was who first decided that they would set their fees as a percentage of assets under management knew what they were doing.

Think about it for a moment. First, as the economy grows, so does prosperity and the amount of money that people have to invest. Ergo, the fees earned by asset managers continue to increase substantially without them having to lift a finger.

Secondly, over time, markets too go up. After all, we wouldn’t invest in them if they didn’t. So again, the value of assets under management almost automatically rises with no input whatsoever from the asset management industry.

Ah, you might say, but presumably the industry’s costs rise in line with assets under management? But they don’t. The cost of managing, say, £10 million is not too dissimilar to that entailed in managing £100 million.

So, what does all this mean in terms of the amount of fees we pay? Well, a new 32-page report by the consultancy LCP illustrates how UK pension funds are paying asset managers up to 70% more than six years ago.

Matt Gibson, one of the report’s authors, told the FT: “The asset management industry is very profitable, partly because of its scalability, and our view is that managers should share the economies of scale with investors.

“Our findings highlight just how important it is for pension schemes to regularly monitor their investment managers and put negotiating pressure on them to reduce fees.”

The LCP survey also highlighted the fact that active managers are primarily rewarded to attract and retain assets under management, and not to achieve outperformance. In addition, it found little evidence that funds which charge more deliver higher returns. Indeed the two highest-charging managers in the sample achieved some of the lowest returns.

Speaking with my Transparency Task Force hat on, another hugely concerning conclusion of the LCP report is that the way transaction costs are reported lacks consistency. With different fund managers taking their own approach, it’s almost impossible for financial professionals, let alone ordinary investors, to compare the value delivered different product providers.

Of course, LCP’s findings are very much in line with those of the FCA’s interim report on its study of competition in UK asset management. That report, you may recall, found there was “weak price competition” in a number of areas.

This latest report, then, provides yet more evidence that competition is not working. If it were, fees would be falling as markets and assets under management rise.

How much more evidence, you have to ask, do regulators, and indeed politicians, need, before deciding that enough is enough? It really is time for decisive action to protect end investors from the asset management industry.

 

You can read the report here:

The fee paradox: LCP investment management fees survey report, April 2017

 

 

Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.

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