Pension funds could be paying asset managers as much as 70% more in fees than they were six years ago, according to a study from the LCP consultancy.
The study, published ahead of an investigation by the UK financial regulator into the fees charged by asset managers and amid concerns over the lack of price competition within the industry, highlights how active managers are rewarded by simply retaining assets and not necessarily achieving outperformance.
The study concluded that, while average headline fee rates have fallen in 60% of asset classes since 2011, this has not been enough to offset the revenue-boosting benefit of investment market growth.
“Investment managers have done very well out of increases in assets under management over recent years,” said Matt Gibson, partner and head of investment research at LCP and author of the report.
“However, this has been driven primarily by general rises in equity and bond markets. Whilst we welcome the reduction in fee rates in many asset classes, overall, investment managers are charging much more but don’t seem to be doing more.
“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 survey looked at total costs for a £50 million (€58.6 million) investment across the most popular asset classes used by LCP’s clients.
Of the asset classes covered by the survey, the highest average costs were for UK property at £590,000, with passive UK equity coming in lowest at £38,000. Some asset classes that are not regularly used by LCP’s clients, such as certain hedge fund strategies, have even higher charges.
For defined contribution pension schemes, the survey identified the benefits of using platforms over accessing funds directly. For a £10 million investment in a passive global equity fund via a platform, the fees were £5500 lower.
The survey also found a lack of consistent and transparent reporting on transaction costs. Some asset managers only provided information on explicit trading costs – such as broker’s commission and stamp duty.
Others attempted to quantify implicit costs such as dealing spreads and the impact of the fund’s transactions on the market price of a security.
The difference in minimum and maximum reported transaction costs from UK equity mandates varied widely with costs ranging from £20,000 to £400,000 for a £50 million mandate.
LCP says that this wide range of costs is due to the differences in the elements that are included, rather than real cost differences.
Gibson said that two regulatory changes might encourage managers to become more open about these hidden costs.
“First, the FCA is in the process of setting out guidelines on the information asset managers must provide defined contribution schemes on how transaction costs are calculated,” he said.
The second is a MIFID II rule, tightening the regulations on broker commission costs related to research.
“Our discussions with investment managers suggest that most will opt to pay for these research costs themselves so it will no longer be an additional cost borne by investors,” Gibson said.
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