Funds management fees globally will continue to drop as wealthy, time-rich and computer-savvy retirees apply consumer pressure on the sector, according to Alan McFarlane, head of the Edinburgh-headquartered Dundas Global Investors.
On a promotional tour in New Zealand last week, McFarlane said while fund fees have come off slightly in recent years the price drop has not been “commensurate with the gigantic growth in assets under management” since the GFC.
He said a post-crisis period of healthy market returns combined with global “mandatory or semi-mandatory” retirement savings regimes have created huge pools of assets that should’ve seen manager fees drop based on economies of scale.
Instead, McFarlane said the active funds management industry, in particular, has failed to pass on scale benefits to consumers. However, he said as an increasing number of retiring baby-boomers come to rely on investments to fund their lifestyles, the “friction cost” of fund fees will “come under more scrutiny”.
“Most of these [retirees] are very smart people with time on their hands, they’re computer-literate and they’re going to put pressure on managers to lower fees,” McFarlane said. “As a cohort they may shift to indexing, for example, and that communicates they understand fund pricing models.”
He said fund managers could adapt to the lower-fee era in several ways including by: reducing the number of products; using technology to boost efficiency, and; adopting a partnership ownership structure that would “alert managers to costs as well as remuneration”.
“But investment management will always be pretty well remunerated,” McFarlane said. “I’m not suggesting it will be penury for fund managers.”
Prior to forming Dundas five years ago, McFarlane was head of Edinburgh-based funds management firm, Walter Scott & Partners. Heathcote Investment Partners represents Dundas in New Zealand.