Fee Innovation Must Be Constant for Managers in a Price-Sensitive, Commoditized Market
November 4, 2020 — Boston
Fund managers pursue fee innovation to stave off fee compression
Managers with active management legacies continue to struggle to retain and grow marketshare as more investors use combinations of active and passive strategies, according to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition. For these firms, it is vital that they are competitive from a pricing perspective, setting their sights on fees that are at least below median, with many aiming for the top quartile.
Intermediation and commoditization are the biggest factors impacting ongoing fee compression. Many investors wield significant buying power due to the size and scale of centralized influence points, bolstering the collective bargaining abilities of financial advisors and institutions. “This aggregated scale allows these institutions to more aggressively pursue pricing concessions from asset managers through their skill and experience in fee negotiation,” says Brendan Powers, associate director at Cerulli. In addition, increased commoditization has led to a proliferation of cheaper potential substitutes for active strategies, leading to heighted competition—further driving down fees.
According to the findings, one common way managers stave off compression is through pursuing fee innovation through share class expansion in which a broader range of investors have access to lower-cost mutual fund shares or vehicle structures. “Some firms may pursue outright structural changes to how they are paid, while others do not want to make drastic changes, instead opting to tweak eligibility for certain client segments to provide them with lower-cost access to their investment strategies,” remarks Powers. In recent years, expansion of share class eligibility comes as more managers broaden institutional share class eligibility to retail investors. The launch of retail versions of performance fees in which management fees rise or fall equally depending on performance versus a benchmark—fulcrum fees—is another notable example of fee innovation.
Moreover, ongoing vehicle proliferation is also an avenue through which asset managers are trying to bring lower-cost products to clients rather than structural fee innovation. By deploying investment strategies using exchange-traded funds, separate accounts, or collective investment trusts, there can be cost savings, greater pricing flexibility, or both.
“Ultimately, in the hyper-competitive and increasingly commoditized U.S. asset management market, fee modification is never a fully complete exercise,” says Powers. “Fund managers need to continually evaluate whether their product offerings are competitively and sensibly priced relative to other strategies and to the rest of their product lineup,” he concludes.