The impact of fees on investment returns are magnified when returns are low, which is one reason many investors are asking for lower fees. We asked five DFMs if fees are still the most important discussion advisers want to have, and how willing asset managers are to reduce fees.
The quick answers are yes, fees are one of the top discussion topics, and yes, asset managers are willing to negotiate.
There is however a but, which is that very low fees could see smaller asset managers crowded out of the market and result in less than desirable outcomes for investors.
How much focus are financial advisers putting on asset management fees?
‘Fees have always been important for financial advisers, but the moderate-to-low return environment in South Africa over the last five years has heightened the focus on fees,’ said George Dell, head of business development at MitonOptimal (pictured above).
‘If an investment returns 20% a client won’t resist paying a 2% fee as much as they will when an investment returns only 5%’ said Darren Burns, head of investment solutions at Glacier Invest.
Fees aren’t the only determinant of returns and they aren’t the only issue advisers focus on.
‘Fees are not necessarily the main focus when we engage with advisers,’ said Daniel Schoeman, CIO of Analytics. ‘The ability to generate returns for clients in the low return environment we’re facing is a very topical issue.’
Are asset managers willing to negotiate fees?
Victoria Reuvers, MD of Morningstar Investment Management SA, said certain asset managers who have gathered large assets into select strategies have been ahead of the curve and reduced fees on those strategies.
Burns pointed out that some of the fee reductions they have seen are significant, with some asset managers eliminating different fee classes and offering only clean class funds.
According to Dell, there is a concerted effort to reduce management fees in the passive space. ‘With active managers there are generally broad fee bands that tend to apply depending on the mandate.’
Although the market is certainly under fee pressure, Kathryn van Dongen, MD of PortfolioMetrix SA, said firms with quality propositions have held on to margins.
Theoretically, fees can go to zero, but that might not be possible for all asset managers – particularly the smaller ones.
As Dell of MitonOptimal said, asset managers are open to discussions on fees – if the assets are there.
‘For some larger investment managers who benefit from the economies of scale it will be easier to reduce fees over time, while some of the smaller asset managers may be crowded out by fee compression,’ said Schoeman of Analytics.
Fee pressure could mean some of these smaller players leave the market, or merge to survive, which Burns said they are seeing in the local market.
This may not be good news for investors. Boutique asset managers have made the investment industry more competitive and given investors more opportunities, along with good returns.
‘Smaller managers are more flexible than their larger competitors and can access sectors in the investment environment larger managers cannot,’ said Burns. ‘They have a lot of potential to generate superior returns.’
Asset management is not free
Another concern with low fees is that investor returns are compromised. Most of the DFMs we spoke were clear: you get what you pay for. Pay too low a cost and you might not get the best investment manager or process.
‘Cheap is not necessarily better,’ said Reuvers (pictured above).
Van Dongen agreed: ‘Even small out-performance from a good manager over time not only covers their fees but compounds to make a significant difference to investor wealth.’
She said advisers and investors need to see fees as a ‘cost of production’, where production means investment outcomes when evaluating fees.
Van Dongen said there is a virtuous and vicious cycle on fees.
‘Good managers often incur higher costs of production and re-invest in their processes and people, producing better results and garnering assets,’ she said. ‘Firms focusing on discount fees require light, inexpensive infrastructure and being any better than average is difficult – which then puts further downward pressure on fees.’
Will it end at zero fees?
Burns believes we have some way to go in the race to the lowest fee possible, but if we get to a zero fee, investment managers will have to find other revenue streams.
And if the management fee lands up at 0%, there will be other costs charged, somewhere.