The million-dollar question
In this Month’s Off the Record we talk about that murky subject, ‘commissions’ – or, for want of a pun, the million ‘soft’ dollar question.
In the light of the recent Myners review in the UK, which recommended that external research and broker commissions be included in investment managers’ fees, we asked just how aware you are of what is being paid by the fund in commissions and, more pertinently, how happy you are about it.
The answer on the whole is a double negative. No you don’t for the most part know what you are being charged in commissions. And no you are not happy about it!
This should make for interesting reading then….
To begin with, the vast majority of respondents (65%) do actually pay commissions on top of their asset management fees. The remaining third of schemes have arranged bundled fees with their asset managers, which shows that this is neither a new issue, nor an implausible concept for the asset management world.
The overarching problem with commission charges becomes clear, though, when you consider that only just over 20% of pension funds know how much on average they pay in additional costs.
Not everybody is so blasé about these added fees. One fund head points to the comprehensive arrangements that are in place with its custodian and investment managers to analyse just exactly what is leaving the coffers: “Our custodian offers us an independent trade execution analysis report. It tells us our commission cost is +12.5bps.
“Our managers are contractually excluded from acting as a broker as well. The only asset manager/ broker who received an exception to this rule has agreed not to charge any brokerage fees.”
Another scheme has taken its own initiative on the issue: “We do not follow it permanently in detail but in 1999 we made a thorough examination and for Swedish managers it was 0.1% of the total capital.”
The same scheme manager goes on to note that this represents more than 10% of the total asset management fees – no mean amount!
Despite the size of some of the numbers being wrapped up under cover of commission, it may come as a surprise that only a solitary fund says it receives any kind of breakdown of exactly what makes up this ‘commission’. Even then only one of its three investment managers gives such a breakdown.
Fifty per cent say they at least get notification of the portion of the fee paid that is made up of commission. But, as for a split between the cost of additional research or the cost of transactions themselves… well, it seems there is a lot left to be desired.
One pension fund manager says it does receive figures for the total of soft commission as a percentage of total commission, noted as: “The value of softing services received as a percentage of total commissions paid.”
On the whole though, any information you do get would appear to be of dubious quality. Sixty-three per cent of you claim the information received is poor, with only marginal numbers (20%) claiming that they are either satisfied, or pleased (12%), with the information.
Asked whether you could suggest any ways that this information could be supplied, a couple of funds make some pertinent contributions.
One notes that it would like to see commission costs at least divided between the asset manager’s in-house charges and those incurred externally from broker research and the like.
Another adds: “We would like to see this added to the quarterly report as part of the non-valuation/transactions reporting.”
Asset managers take heed…
Surprisingly, however, around half of you believe that the commission costs charged by investment managers in the domestic market are lower than those charged to other pension funds overseas.
Here at Off the Record, this comes as something of a puzzler. When looking at the provenance of the replies, the variety of countries involved would suggest that not everyone can be right in their assumptions!
Those sales people are obviously worth the money they are paid!
One manager from the UK, comments: “The local competitive UK market is better than the rest of Europe.”
A Belgian peer lauds the ‘value’ of their own market: “Our report shows that the Belgian market is one of the less expensive countries when it comes to brokerage commission, taxes and market impact costs.”
Significantly, the latter fund is the only one to confirm that it has carried out a review of this issue within the fund itself, compared to the domestic market, and in relation to overseas pension plans.
More telling perhaps is the fact that only just over a third of the funds replying this month had made any kind of internal review on the commissions question.
This is reflected in the fact that when asked whether commission charging was high on the pension fund agenda, two-thirds of you say it is only of ‘moderate’ concern to the plan. Indeed, more of the remaining funds (25%) said they were ‘not at all concerned’ about the issue than confessed to being ‘very concerned’ (12.5%).
So, is this a storm in a tea cup? A non-issue for those at the coal-face of pension fund management. Well, not quite…
Two out of three funds say they support the need for more transparency in this area of their business, with one noting the smokescreen that pervades much of this oft-vaunted ‘professional’ sector: “Brokerage commissions are not declared as such, instead they are mentioned as transaction costs, which is a broader term and may also include local taxes etc.”
This is certainly not to say that most pension funds believe that a flat fee from asset managers including commission costs would result in any particular savings – a factor that has been underlined in the Myners report itself.
Far from it. In fact, 75% of responding funds say that costs are likely to stay the same under any new regime. Not one argues that this would improve the cost aspect, while a handful feel costs would even rise in a bundled structure.
As one fund opines: “Investment managers would not agree to an overall reduction in fees.”
Another asks about the practicalities of such flat fee arrangements: “We believe research, brokerage and investment management should be strictly separated from one another. Therefore, a bundled fee would not be possible.”
One UK-based fund challenges the direction of the Myners report itself, labelling the Gartmore chairman’s crusade on commission as ‘misguided’.
“The Myners proposal to bundle commission with fund management fees is misguided. The effect would be to lower a fund manager’s profits if he traded more, to create a disincentive to adequate turnover. This is surely as wrong-headed as the old practice of transaction fees, which gave an incentive for too much turnover.”
Food for thought there.
Nevertheless, it is clear that this is a debate that needs airing. Nine out of 10 replies say they believe that national regulators should be lobbying on behalf of schemes over the soft dollar/commission question – if only to ensure that opaque practices today are cleared up going forward.
One fund encapsulates the nub of the discussion – misguided in parts, or otherwise: “Cost effectiveness is essential for pension funds in executing their fiduciary duty. Members of the plan should be aware of what the costs of the pension fund are. This might relate to administration costs as well as investment costs.”
Let’s see if the industry is ready to walk it like it talks it.