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Penny pinching

New battleground in investors’ fight to contain fees

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Curing: Rick Di Mascio called the fee model being used by his firm an ‘antidote for pay-for-play.’

New fee arrangements, emerging in response to institutional investors' push to cut costs, could put pressure on revenues of both investment managers and consultants.

Fee pressures on managers have been building in some areas. But recent initiatives seek to change the fee landscape, shifting the burden to managers from investors, and removing investment consultants from the manager selection process.

The question is whether of the initiatives will catch on. Similar web-based efforts by Investor Force Inc., eFrontiers and others in 2000 - which played cupid to investors and managers, and sent managers the bill - fell flat.

New initiatives include:

c Pension Fund Service.com Ltd., Macclesfield, England, which is in the process of selecting consultants to provide manager selection services for a new procurement platform for corporate pension funds. Once appointed, consultants will name managers to shortlists in various equity, bond and alternatives asset classes; corporate funds would pay a fee for the information before selecting a manager from the list, avoiding the need to hire a consultant.

c A program being run by local U.K. government pension funds joining together to select shortlists — known as framework agreements — of investment consultants and global custodians from which all government funds, representing 134 billion ($212 billion), would choose. A similar list of actuaries was selected in June.

c Inalytics Ltd. has begun integrating its quantitative analysis of manager performance and attribution services into a global search platform where the managers — not investors — pay Inalytics to assess their skill. Managers who don't pay for the Inalytics evaluation are free to bid for new business on the platform.

Managers and consultants agree that pension funds are eager to pinch pennies, but shrug off the suggestion that efforts such as these will affect their businesses much. Still, the evolution of new search fee structures is putting off some managers.

“Ten years ago it was extremely rare we would walk away from new business,” said one money management executive who requested anonymity. Now, the executive picks carefully among new searches, depending on the fee process.

For example, the manager doesn't participate in searches led by search consultant bfinance International Ltd., which began ruffling feathers back in 2004 when it introduced its fee model: free for investors, with fees to bfinance paid by managers who win searches (Pensions & Investments, May 31, 2004).


Money managers say models in which they bear the costs have the whiff of pay-to-play, and that ultimately they will look to push the fees back onto clients.

But Rick Di Mascio, CEO of Inalytics, London, says his model is different. “This is the antidote for pay-to-play. The pension fund will not exclude any manager that doesn't submit an Inalytics report (as part of the procurement process). It's absolutely (the manager's) choice, and they can tender without it.”

Also, he said the size of the fee charged to managers, which he would not disclose, is too small to incorporate into a management fee, adding the fees likely would meld into a manager's general cost of doing business.

The anonymous money manager was not impressed. “At least in bfinance's model you only pay when you win business. (Inalytics' model) is pay to participate; that's even” less attractive.

Another asset management executive, also speaking anonymously, said his firm has hired Inalytics for years to analyze its portfolio managers' trades across various equity strategies. As a consequence, that firm pays much lower fees to participate in searches. “It's a very, very good product,” the executive said of Inalytics, conceding, “it might make a difference if you're not convinced by” the value Inalytics provides a manager.

Mr. Di Mascio said even though the procurement platform hasn't been officially launched, it has completed a $90 million U.S. small-cap value equity search, with a e640 million ($803 million) European equity and a e100 million Asian equity mandate search under way. He would not name the investors.

Efforts in the U.K. to create collective procurement platforms would affect investment consultants first. But investment managers are in pension funds' cross hairs, too.

Norfolk County Council Pension Fund, Norwich, England, is taking the lead on searches to establish framework agreements for investment consultants and global custodians to serve all U.K. local government pension plans, representing combined assets of 134 billion, said Nicola Mark, head of the 2.1 billion plan.

The search processes, expected to begin this fall, would lead to the signing of providers to pre-approved lists. Local government officials would then hold “mini-competitions” among those on the lists when hiring a new consultant or custodian.

“The key benefit is time,” Ms. Mark said. “However you do (a public procurement process), it takes almost a year” while the mini-competitions could be finished in four weeks.

The framework structure also would save a member fund about 50,000 per search, she said.

Norfolk led a similar national framework search for actuaries that ended in June with the selection of Aon Hewitt, Barnett Waddingham, Hymans Robertson and Mercer to the list.

Although pension plans are free to continue using the traditional search process, limiting a framework agreement to a handful of investment consultants could significantly dent the business prospects for a consultant left off the list. But Peter Ball, managing director and head of investments at JLT Investment Solutions, London, expects the consultant list to have more names than the actuary list and said it will include all major players, regardless of size.

“The biggest hurdle is making a commitment to the marketplace — you have to make that long-term commitment,” Mr. Ball said. Smaller players or newcomers “need to do that, regardless of whether there's a framework or not.”

A nationwide framework search won't likely be used for investment managers, Ms. Mark said, as individual plan needs differ greatly depending on their investment portfolios. However, she said public plan executives are trying to think creatively about ways that U.K. public funds might use their collective strength to cut investment costs.

Meanwhile, Chris Southworth, CEO of Pension Fund Service.com, said he expects to begin searching this month for investment consultants to provide shortlist selections for a service he's starting for corporate plans. As with public frameworks, he expects pension funds will look to his service to cut time and money (he expects fees of one-fifth or less of the typical charge) off the manager search process.

“Cost is important. Everybody is looking to cut costs where they can, but not to cut quality,” said Terry Faulkner, group head of pensions at the 1.8 billion Rexam PLC Pension Plan, Tonbridge, England. “The quality of research is very important.”

However, he said manager research has become “a commodity business” because consultants aren't able to provide an edge on established and well-known managers. He believes consultants should pool their efforts on established players “and concentrate on new players or less well-known managers.” n

This article originally appeared in the September 3, 2012 print issue as, "New battleground in investors' fight to contain fees".