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Mad executions

The German asset management fee structure is, well, simply crazy. Where else would you find those running respectable investment management businesses come out with such utterances: The bank gets ten times more out of the transactions costs than we get out of the management fee." What bank is the managi ng director of a sizeable KAG referring to? His own parent banking group.

He adds: "I know we are part of the same group, but it is not fair if we only get a fraction of what they get."

The typical approach is to charge a low fee for the KAG management service and the parent bank which is providing the custody or depot, and often the dealing services, at charges over and above the commission fees. The result is that clients end up facing overall significant charges. As another asset manager puts it: "Banks offer a competitive price structure for the asset management, because what they won't make on that fee they will make at the trading floor and execution levels. The idea of 'best execution' is new to the market."

Some times there are arrangements to pass some fees back to the KAGS, but such transactions have to be ac-counted for and be done in an above board way. One reason given for how the fee system developed is that "in the law, there is no suggestion not to use the same depot bank, which is usually easier to do. Then most transactions are channelled through the bank," says one manager.

A KAG manager complains that it breeds an expectation of ever lower fees on the part of clients for asset management. "Some clients looking for 8bps for an active European equity mandate, which is ludicrous."

"Most KAGs would like a transparent and clear fee structure comparable to that internationally, which we do not have currently," he says.

Another KAG manager goes so far as to welcome the incursion of the international managers, with the hope that their competitive pressure will mean the disappearance of transaction charges and more management fees.

Clients are unhappy with this charging structure, the recent Greenwich Associates report on Spezialfonds found. "Institutional investors resent the above market rates on security transactions and often complain about the lack of transparency with regard to various charges in addition to the management fee," says Berndt Perl, of Greenwich. "In our 1998 study, 12% of all large Spezialfonds investors have already negotiated with some of their KAGs pure investment management fees on a 'best execution' basis for all securities transactions." More funds (14%) plan to go this way in the next two years. A fifth of all large funds had an all-in fee arrangement.

The average fee paid for investment management was 31bps for insurance companies and 32bps for pension funds. "Average investment management fees are over 10% higher in 1998 than 1996, but are still low in international comparisons," he says."

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

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