The performance of the financial markets has a 2.5 times greater impact on investment fees than the performance of the manager, meaning even managers who underperform in rising markets see their fee increase, according to new research.
LCP’s annual survey of investment fees also found 65 per cent of investment managers were unwilling to provide data on transaction costs, with disclosure by the fund of hedge funds universe being particularly poor, with only one manager willing to provide details of the ongoing charges figure.
But the report noted a positive shift towards increased fee transparency, with 80 per cent of investment managers surveyed this year providing data on indirect costs.
LCP argues a new structure of fee would better reflect manager added value. It proposes reducing the base fee to a low – even fixed – level and augmenting it by a more significant performance-related bonus. The total fee would then be capped to prevent excessive risk taking.
The survey also found fee transparency has moved up the “to do” agenda for investment managers, as evidenced by the recent publication of the Investment Management Association’s ‘best practice guidelines’ and similar guides produced by the ABI and the NAPF.
It also suggested significant scope and opportunity for pension scheme trustees to re-negotiate fees, highlighting a difference in manager fees of more than £200,000 a year for a £50m active global equity mandate. The report highlighted three successful case studies with fee reductions of up to 38 per cent.
LCP partner and report co-author Heather Brown says: “It is encouraging to see the increased level of transparency revealed in our survey; the direction of travel is clear. However, there is still some way to go and it is disappointing that fund of hedge funds managers are still reluctant to disclose costs fully.
“The disconnect between manager performance and fees earned is also a concern and we recommend an overhaul of fee structures. With today’s low returns and high deficit levels, trustees would do well to focus on the fee savings that can be made. Clearly, this is in the interests of trustees, scheme members and sponsoring employers.”