Independent fund research company Fitz Partners has released its latest ‘Investment Advisory Fee Benchmarking Report’, which found that gross management fees (including distribution fees) have come down by 19.4% since 2015.
The report looks at the level of investment advisory fees charged by asset managers, based on asset managers’ confidential fee schedules. It addresses the cost of investment advisory, defined as the fees paid to entities providing advisory services to the fund. Advisory fees, which would cover asset allocation and stock selection are usually paid out of the funds’ management fees.
Hugues Gillibert, Fitz Partners CEO said, “It has become ever more imperative for asset management firms to measure the level of fund investment advisory fees as it represents a significant part of their funds management fees and would impact asset managers’ revenues substantially. At a time when talks of squeezed margins are widespread, there is a real need for asset managers to be able to benchmark the internal structure of their management fees.”
In the past few years, the firm has seen management fee levels decreasing whilst the investment advisory fees were still rising until last year when a downward trend began in the overall level of investment advisory fees. Overall, the average investment advisory fee has fallen by 9% from 0.393% to 0.358% in the last 12 months, reinforcing the sentiment of pressure that started last year. Over the last two years, investment advisory fees have dropped by a significant 13%, compared to 19.4% for gross fees.
When looking at equity funds across all sectors, Fitz Partners found that the share of management fee paid for investment advisory has increased by 27% over the last five years just as the ‘quoted’ level of gross management fee charged by funds has been receding at a quicker pace than some of its internal parts. Therefore the remaining revenue or margin received by fund houses from management fees, after any investment advisory and distribution fees, has been dramatically reduced. This change in advisory fee proportion would also have a significant impact on asset management firms using shared revenue ratio in their transfer pricing rules.
Gillibert said, “Although we are seeing a definite decrease of investment advisory fees levels, this reduction is still slower than that of quoted management fees. The difference in both reduction rates reflects, on one hand the greater pressure on publicly quoted fees coming from investors and distributors but on the other hand, a lack of elasticity when it comes to the pricing of funds’ investment advisory function be it from resisting internal teams on which their remuneration depends or pressure from static internal transfer pricing rules.”