Asset managers increasingly willing to negotiate on active management fees

An increasing number of asset managers are willing to negotiate over performance-based fees, conceding these should only be paid when outperformance is 2 percentage points above the agreed benchmark.

In a study conducted by bfinance, the consultancy said it was important for asset owners to ensure their fee structures were not counterproductive, as an absence of fee caps could incentivise managers to take unnecessary risks.

It also recommended that asset owners consider a rolling benchmark outperformance as a measure for performance fees, but conceded there had been a trend whereby a “significant” number of active managers were willing to compromise on fees.

The report said around one-third of asset managers monitored allowed for a fee structure where outperformance remuneration was only awarded once they exceeded the benchmark by 2 percentage points.

“This was not the case when we conducted the same survey three years ago,” the consultancy noted. “The alignment of interests between institutional investors and their managers through performance-based fee elements is a trend that bfinance applauds.”

It further found that 22% of active managers would propose a fee structure whereby outperformance was rewarded as soon as a 1 percentage point outperformance occurred.

When examining a sample of 100 managers, the report also found little correlation between shortlisted managers and fees initially quoted, therefore recommending that asset owners concentrate on selecting the manager best suited to its demands and later focus on fee negotiations.

Ian Shea, head of equities at bfinance, said: “Counter-intuitively, the correlation between high-quality asset management and fees is weak.  

“The most adept managers are also those that are most inclined to be competitive on fees and inclined to work with asset owners to find creative performance fee solutions.”

Fees paid to managers have become a contentious issue in a number of countries in recent years, with both the Swiss and UK authorities paying greater attention and forcing the disclosure of costs.

Dutch pension fund PFZW, meanwhile, has sought to introduce penalty clauses for external managers that underperform.

For more on asset management fees and how pension funds are tackling them, see a recent Special Report in IPE

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