Thursday, September 12, 2019 Stamford, CT USA — A worldwide shift of portfolio assets to passive management strategies and a new, intense focus on fund pricing by institutions globally are driving down fees for asset managers. This, in turn, is putting pressure on asset management revenue growth and profit margins.
A new report, Pricing in Asset Management: From Art to Science, from Greenwich Associates analyzes the factors that have made fees a top priority for institutional investors and examines ways asset managers can use sophisticated benchmarking to minimize the impact of eroding fees, and even turn pricing into a competitive advantage.
It all starts with good data. Without reliable benchmark data on fees, managers are operating in the dark and in this era of tough negotiations, even average industry benchmarks are of limited use. To compete effectively, managers need insights that allow them to provide customized pricing and fee structures based on the size of mandate, asset class, strategy, geography, and a host of other factors. For example:
- Data from Greenwich Associates Fee Clearinghouse reveals significant discrepancies in average fees paid by corporate pension funds, public pensions and endowments/foundations. For mandates of up to $100 million, corporate funds pay the lowest average fees, at 52 bps in equity and 38 bps in fixed income. At the other end of the spectrum, for fixed-income mandates, average fees jump to 45 bps for public funds, endowments and foundations, and in equities fees average 73 bps for endowments and foundations. As Greenwich Associates Managing Director Andrew McCollum explains, “The takeaway is that even across basic categories like client type, managers without this sort of granular data are at risk of underpricing or overpricing mandates by 15 basis points or more.”
- Fee Clearinghouse data confirms that managers with top-quartile performance are able to charge higher fees. However, that premium materializes only for performance over the past year. It does not exist for managers that have delivered top-quartile performance over the preceding three- or five-year window. As Andrew McCollum explains, “Lacking high-quality data, managers with strong three- and five-year track records would be at risk of pricing themselves out of business, while managers with strong recent performance might be too cautious about increasing fees, leaving money on the table.”
In the current environment, mispricing can be fatal to a manager’s business. For an asset manager with annual inflows of $5 billion and average all-in fees of 50 bps, losing just 5% of mandates due to overpricing could cost the firm $10 million in revenues. By the same token, underpricing 5% of mandates (say by 10 bps) would equate to $2 million in lost revenue. The negative impact on margins could be even more significant over the life of the mandates.
As Andrew McCollum concludes, “Simply put, managers that attempt to set and negotiate prices without access to granular benchmark data are putting their business at risk.”