Investors and asset owners globally are grappling with cost management challenges as fund servicing and ad hoc charges rise although management fees are on the decline.
The Investors’ Costs and Fees report, which surveyed nearly 200 asset owners in more than 20 countries, found routine fund servicing costs like custody, audit, and legal charges, are on the up and up amid persistent inflation, heightened ESG requirements, and regulatory burdens.
Some 35 per cent of investors reported an increase in fund servicing costs over the past three years.
In comparison, 46 per cent of investors said management fees on a like-for-like basis have declined.
“While asset managers often find it hard to implement material increases in flat fees for institutional clients, rises can take many forms, including additional (non-fee) costs and more performance-based fee structures. Some other providers, such as those involved in custody and audit, can find it somewhat more straightforward to implement price hikes,” the report stated.
“Even where underlying costs should be falling, such as trading with improved automation, those savings are not always being passed on to clients and other transaction-related expenses — such as ‘market impact’ cost — remain often-unseen.”
Previously, for more than a decade following the GFC, investors enjoyed better savings with cost transparency facilitated by regulation, low interest rates, and downward pressure on asset management fees.
Now, non-transparency and non-comparability remain widespread across many cost components and asset classes, the report observed.
It found high levels of dissatisfaction with cost transparency, with only 27 per cent of investors happy with the transparency of market impact costs and 45 per cent for trading and brokerage expenses. On the management fees front, a majority (83 per cent) were satisfied.
More than cost transparency, investors expressed dissatisfied with cost comparability. Only 14 per cent were happy with the comparability of market impact costs and 24 per cent with trading/brokerage expenses.
Additionally, they were dissatisfied with management fees (37 per cent) and performance fees (48 per cent).
“Although we’ve seen some investors making major strides on the subject of cost management, this report really illustrates how far the investment industry still has to go before it reaches high standards of ‘cost transparency’ and ‘cost comparability’ in the eyes of asset owners,” said Duncan Higgs, managing director and head of portfolio solutions at bfinance.
“This subject will likely come under greater scrutiny now that costs in many areas are rising — particularly in fees for fund servicing (custody, audit, legal) and various ‘ad hoc’ charges passed on by asset managers to their clients outside of the management fees. We still see real scope for investors to improve value for money, without compromising on strategic goals, in areas such as transaction cost analysis.”
In terms of asset classes, costs relating to fixed income saw the most satisfaction (around 65 per cent) compared to private markets (16 per cent) and liquid alternatives (18 per cent).
The report identified lack of transparency in private markets as a significant program, with 44 per cent of investors dissatisfied with the current level of cost transparency.
“The data and anecdotal comments throughout this report really illustrate the extent to which investors are now facing cost-additive pressures,” said Kathryn Saklatvala, head of investment content at bfinance and report co-author.
“This is a real contrast versus the previous decade, when low interest rates, downward pressure on management fees, and improved (though still imperfect!) transparency helped considerably to reduce like-for-like costs for investors.”
