In the latest edition of its ‘Investment Advisory Fee Benchmarking Report’, independent fund research company Fitz Partners gives a unique insight into the level of investment advisory fees charged by asset managers.
Fitz Partners’ research is based on asset managers’ confidential fee schedules and exposes the true 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, says: “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, we have 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 per cent from 0.393 per cent to 0.358 per cent 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 per cent while “gross” management fees (including distribution fees) have come down by 19.4 per cent since 2015.
When looking at equity funds (all sectors), the share of management fee paid for investment advisory has increased by 27 per cent over the last five years 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 says: “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.”