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We need to talk about
management fees
The UK’s regulator has criticised fee structures for active managers, but it could
have effects right across the supply chain, says Charles Gubert.
T
he British and Irish Lions,
a touring rugby union team
comprised of the best of breed in
England, Ireland, Scotland and
Wales, was subject to a rallying
call in 2013 by one of the coaches
whereby he forcefully instructed
the players to put their opposite
Australian numbers into the “hurt
arena,” which they duly did. The
comparisons between the then
deflated Australian rugby team
and active asset managers is quite
fitting, certainly in the UK.
The UK regulator – the Financial
Conduct Authority (FCA) – penned
a study in November 2016 which
stated active managers were not
delivering value for money to end
clients, and queried why there
had been limited fee compression,
versus the continuous lowering of
fees in passive strategies.
The regulator followed this
criticism with another indictment
on 3 March, stating a number of
managers had failed to implement
meaningful improvements in
how they spent customer money
through dealing commissions. A
handful of firms, according to the
FCA, were using deal commis-
sions to purchase services deemed
ineligible such as market data and
corporate access.
The FCA’s position is pretty clear.
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TheTrade
Spring 2017
Fund managers need to either
pay for research themselves or
create separate research pay-
ment accounts, and budget more
sensibly for such costs. This is not
a huge issue for larger firms who
will already employ significant
research teams, but it is trickier for
boutiques who are often far more
dependent on external research
sources.
Some had hoped Brexit would set
the starting gun off for deregu-
latory measures, but this has not
happened. The UK is a member of
the EU still, and will continue to
enact Directives and Regulation
stemming from the EU until its
membership lapses. Even after EU
membership expires, the tone of
recent FCA public statements to
the asset management industry can
hardly be described as warm.
With regulators publicly criticis-
ing fees and performance, institu-
tional investors are going to apply
leverage on managers. Many already
impose significant pressure on
active management fees. In a world
where regulation is becoming more
expensive, fund managers are facing
an intimidating challenge to their
business sustainability. Retail clients
are also increasingly attracted to
cheap passive funds, and this is
probably one of the reasons behind
several mega mergers of late in the
active world.
Ultimately, cost pressures at man-
agers will be felt by their service
providers. The sell-side has faced
a number of conversations with
managers demanding more ser-
vices at lower cost. This was most
evident at NEMA in Dubrovnik
where asset managers said they
expected their custodians to main-
tain hot contingency networks, but
were unwilling to pay additional
charges for it. Fund managers point
out such a service should be in-
cluded in the custodian’s offering,
and not be a value-add.
But service providers should not
give up yet. The current low interest
rate environment is forcing fund
managers to reposition themselves,
and identify new revenue streams.
Some asset managers are lending
out securities or cash collateral in
increasing abundance, and this is an
opportunity for banks.
More optimistically for active asset
managers is that the era of incredibly
low interest rates may be reaching
its conclusion, and that could mean a
return to profitability. This can only
be good news for the the custodian
banks out there banks. After all, the
Australian rugby team recovered its
form after 2013 to become World
Cup finalists in 2015.