Australian fund managers may be under more pressure from their big clients to reduce fees following a comprehensive survey by asset consultant Frontier Advisors which was presented to clients at its 20th annual conference last week in Melbourne.
Senior Frontier consultant, Leigh Gavin, said Australians paid far too much in super fees and in some current cases fees had still been rising as the fund management industry continued to gather the benefits from fees tied to ever-rising funds under management.
Not surprisingly, in the survey, only 6 per cent of fund managers thought they needed to trim fees to be competitive against 42 per cent of Frontier’s consultants. However, later in proceedings, Chris Cuffe delivered a loud wake-up call. The veteran fund manager and now chairman of Unisuper, warned the industry it needed to prepare to halve average management expense ratios (MERs) to a figure like 0.4 per cent.
Gavin said industry-wide costs had risen between 2011 and 2014 – except in the case of retail funds where the switch to My Super products had seen fees fall from 1.61 per cent to 0.78 per cent (and investment returns falter slightly as well). But, reflecting increased regulatory and compliance costs and the move to more costly-to-manage asset classes in portfolios, the average industry fund fees rose from 0.76 per cent to 0.96 per cent, over that period. Fees for corporate and public sector funds also rose, to 0.77 per cent and 0.84 per cent respectively.
Gavin said over the last 20 years, fees had risen in almost a one-for one relationship with the funds under management of the world’s biggest fund managers. Thanks to the ad valorem or flat-fee basis, little of the gains have been shared with investors.
There was little evidence of cost cutting by fund managers, especially on salaries. Fund managers earned high salaries on the premise of rewarding those with skills in short supply – much like the high salaries of world soccer players.
Gavin said Australian super fees, based on an OECD pensions survey, appeared to be higher than in the UK, US and Canada. This reflected differing asset allocations between countries and the contrast between defined benefit and defined contribution schemes.
“But controlling for these factors, the survey shows similar fees,” he said, and no marked drop in costs (except in the system in Chile). As for performance, Frontier found no clear link between performance and fees.
In a review of how investors have handled their fee negotiations with managers, Gavin said unlisted assets couldn’t be excused from a value-for-money assessment and the industry needed to think smarter about what value for money meant in the unlisted sector.
With listed assets, Frontier said clients were only benefiting “somewhat” from benefits of scale while managers were benefitting “absolutely”. And, Gavin asked, “are we negotiating hard enough?” His answer: “occasionally”. For the future, he said, the next five years should concentrate on accruing scale and growth benefits for members.
Former Australian Financial Review columnist Barrie Dunstan produced this story for Investor Strategy News (Australia)