Asset managers are not passing on cost reductions from digitalisation and economies of scale to German institutional investors.
This is among the main findings of new research by German consultancy Faros Cost Advisory, focusing on cost reduction in institutional portfolios.
“Over the last year we had €85bn in inflows into German Spezialfonds – the economies of scale asset managers can generate from these amounts are huge,” said Uwe Rieken, managing director at Faros Cost Advisory, at a press conference in Frankfurt on Friday.
Oliver Dräger, senior investment consultant at Faros, said “the time to renegotiate is good” because pressure on costs is rising from various sources.
Rieken added: “Contracts that were negotiated a long time ago with an asset manager for institutional mandates for liquid asset classes are almost certainly too expensive for today’s standards.”
According to figures the consultancy drew from international statistics, today the spread between fees for an institutional mandate for European corporates can be up to 20 basis points.
Rieken said Faros had unearthed potential cost savings of up to €1bn at an unnamed “large Northern German insurer”.
For custodians, Faros calculated that their actual administrative costs have shrunk by three quarters compared to 2000.
“Our research shows there is no connection between fee and quality,” Dräger said.
Emphasising the importance of renegotiating contracts, Rieken said: “In the current markets returns are uncertain the only certainty for higher returns is to reduce costs.”
Secondly, he said, other countries like the Netherlands or Switzerland were leading by example with regulatory frameworks including cost transparency. “Usually I am not in favour of additional regulation, but in the case of cost transparency it might help,” Rieken said.
“Clients often do not know what the benchmarks for costs are,” added Dräger.
From its experience in the Dutch market, KAS Bank has also tried to bring cost transparency to the awareness of German institutional investors.
“The cost quota for pension funds in the Netherlands is 20% lower than that for pension funds in Germany,” noted Frank Vogel, managing director of the German KAS Bank branch at the Faros event.
According to the asset manager’s calculations costs at German pension funds make up just over 0.21% of the total assets, while in the Netherlands they only amount to under 0.18%.
At the event Faros also presented a book it compiled on cost transparency - “Kostentransparenz im institutionellen Asset Management” - the first on the topic for a German-language institutional audience.
In it, the cost transparency topic is covered from various angles via articles from pension funds, associations like the aba, lawyers, consultants, and also international examples from the Netherlands, Switzerland, and UK.