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Cost transparency poses threat to asset managers, says Moody’s

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The UK’s newly launched investment cost reporting templates could hurt asset managers’ business models and financial stability, according to credit rating agency Moody’s.

The Cost Transparency Initiative (CTI) – created by pension funds and asset managers to develop the templates – launched its reporting models last week after nearly two years of work.

Versions of the templates have already helped UK local authority pension funds identify millions of pounds of previously unreported costs, and it is hoped they will be rolled out across the country’s £2.1trn (€2.4trn) pension fund sector.

However, Marina Cremonese, senior analyst at Moody’s, warned in a report this week that the initiative was “credit negative” for asset managers “because it will likely make their cost and fee structures more transparent and easier to compare, encouraging institutional investors to negotiate rebates”.

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“Although adoption of the new cost templates is voluntary, we expect pressure from institutional investors to drive widespread adoption among asset managers, and those that resist the CTI initiative run the risk of losing business from their institutional clients,” Cremonese said.

She also warned that the Financial Conduct Authority could make the code compulsory if the voluntary regime was shown to be ineffective.

“The fees asset managers charge their institutional clients are already under competitive pressure, and are much lower than those paid by retail clients,” Cremonese said. “The introduction of standardised cost and fee disclosure will weigh further on asset managers’ margins, including those for more insulated, less liquid asset classes such as private equity.”

The impact on managers would vary depending on the size, complexity and duration of mandates, she added. Providers able to offer “innovative investment solutions tailored to a client’s financial goals, that have a long track record of strong performance and provide the best value-for-money proposition” were more likely to be able to resist downward pressure on fees.

Asset managers with “solid” balance sheets were also likely to do better as they could offer less liquid investment options, Cremonese said.

Further reading

Scrutinising fees

Managers urged to comply with new cost disclosure templates
Pensions minister Guy Opperman has warned that the government could legislate to enforce the new disclosure model if it is not embraced by investors

LGPS investment costs hit £1bn as cost code sheds light on fees
Local authority funds reported investment costs of just over £1bn for the 12 months to 31 March 2018, according to new data

PwC: Asset management costs to drop 20% by 2025
Charges for all asset classes will fall significantly in the next few years as more remuneration becomes performance-based

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