Survey: Institutional Investors Gain by Negotiating on Fees

(June 7, 2011) — Research by consultant firm bfinance has shown that hard bargaining has given institutional investors the power to negotiate double-digit percentage discounts on fund management fees.

The firm said savings of more than 26% were possible among institutional investors hiring managers, on average, based on the rates that managers were first quoted. According to the research, a typical institutional investor in the United Kingdom allocating £1 billion could also cut fees by about 5% by limiting the number of mandates it has.

The study is a reflection of the heightened pressure on managers since the financial crisis to pay closer attention to their fees in terms of level and structure. As investors suffered huge losses during the financial crisis, management and performance fees and alignment of interest between investors and fund managers have become a greater concern.

The average management fee levels quoted, before negotiation, in bfinance-aided searches over the past 12 months were the following: For actively managed equities across market caps, the fixed fees quoted went down from Latin America at 0.92%; to emerging markets (0.89%); Asia ex Japan (0.7%); global (0.6%); Eurozone/Europe (0.54%); and EAFE and US (each 0.52%). Furthermore, for active small and mid-cap equity funds, the management charges first quoted ranged from 0.85% for Europe/Eurozone to 0.68% for Japan.

“The same investor who chooses to use several active fund managers for diversification purposes could achieve far greater cost reductions by placing investment managers in an open and transparent selection process that encourages negotiation,” bfinance said.

Olivier Cassin, managing director, head of research and development at bfinance, added: “Performance-related fee structures are by their nature interesting, as they align the interests of investors and managers, but investors, with the help of their consultants, must systematically seek to rebalance the structure offered by the fund manager in their favor.”

The study encompassed 50 mandates relating to typical investments in international institutional portfolios with findings based on almost 1,200 price quotes from 350 fund management companies.

A previous analysis over fees has claimed a lack of alignment over active management fees. A report out of London, released in February by consultant Lane Clark & Peacock (LCP), asserted that active fund managers are receiving more credit than deserved as markets rebound. Last year, UK fund managers charged their pension clients an additional $485.1 million, or an increase of 11%, in fees for returns that were largely fueled by strong markets as opposed to superior skills, according to the report.