Pressure to hold down investment management fees is growing and alternative pricing arrangements are gaining favor, but money managers are still earning substantial fees for their efforts, according to a new Pensions & Investments survey of money management fees.
As if to further support the conventional wisdom, the survey also found managers handling international equity assets are reaping higher fees for their work than their colleagues managing domestic assets. The survey found a difference of 10 to 15 basis points between the median fees of international and domestic equity managers; the difference between domestic equity and fixed income was even broader. (See charts on )
The respondents were asked to state the fees they would charge for accounts of $5 million, $20 million, $50 million and $100 million in various asset classes. They also were asked about their use of certain pricing practices and their impressions of industrywide pricing pressure.
Among the domestic asset classes, growth equity generally has slightly higher pricing than value equity, and both domestic equity categories easily outdistanced the domestic fixed-income price scale. However, all fell far short of the pricing for international equity accounts. Fees for international fixed-income management generally topped domestic fixed income, but fell short of the domestic equity rates.
In most cases, the disparities between asset classes grew larger as the accounts grew. For example, while the median fee on a $5 million account was $37,500 for both domestic equity categories and $31,811 for domestic fixed income, the medians for $100 million grew to $470,000 for value equity, $450,000 for growth and only $285,500 for fixed income. The disparities could be a function of the higher fees usually charged by managers for smaller accounts, which may tend to smooth over the differences between asset classes.
The median fee for a $5 million international equity account was $42,000; for international fixed income, it was $22,649. For $100 million accounts, the international medians were $350,000 for fixed income and $562,500 for equity.
For a $20 million account, the medians were $120,000 for domestic value equity, $125,000 for domestic growth, $77,500 for domestic fixed income, $100,000 for international fixed income and $150,000 for international equity. At $50 million, the medians were $260,000 for domestic value, $262,500 for domestic growth, $160,000 for fixed income, $225,000 for international fixed income and $325,000 for international equity.
Fees for managing fixed income assets are generally lower than equity fees, even while there is a premium paid for international expertise, said Gregory Hazlett, director of research at Investment Counseling Inc., West Conshohocken, Pa. Investment Counseling found similar relationships among fees in its own survey of investment management business practices conducted last year.
Clients appear to be trying to gain an edge in pricing through their contract clauses. The survey found 44.7% of managers said they have performance-based fee arrangements with clients. Additionally, 46.1% of the managers polled said clients have requested most-favored-client arrangements, specifying they will pay no more than the lowest fee charged to any client with the same size account.
A survey of plan sponsors by Greenwich Associates, Greenwich, Conn., found the momentum towards adding those caveats in pricing will continue among pension plans. Greenwich's study found 14% of sponsors have performance-based fee requirements and another 9% plan to implement them; 26% have most-favored client arrangements, up from 23% in 1993.
Performance-based fees are cyclical and tend to follow a typical rearview-mirror approach, said Eileen Delasandro, managing director of Quadra Capital Partners L.P., a Boston money management operating company. When managers fail to outperform in a strong market, clients become interested in performance-based fees, she said, but try to pull back when the managers start to outperform again and clients regret the premium.
Managers are responding by becoming more serious about their approach to those fee arrangements, said Mr. Hazlett. While in the past, managers would put those arrangements in place on an ad-hoc basis when requested, many now have established structures for performance-based fees within the firm's schedule, he said.
Ms. Delasandro, whose firm acts as marketing and operations support for affiliated firms, said she was surprised that favored client clauses aren't in more contracts. It makes sense for a sponsors to want to know they are getting the best deal possible and for the managers to reassure them, she said. As long as the manager maintains the integrity of its fee schedule and doesn't undercut it trying to gain business at cut-rate prices, those agreements can't hurt, she said.
"My feeling as an old buyer and an old pension fund sponsor is....I want the same type deal that Saturn (Corp.) has been able to do with cars. I want to walk out of the showroom knowing that no one did better than I did because of keen negotiating skills," she said.
The consensus on increasing fee pressures is rapidly becoming a part of the industry's conventional wisdom. Managers, consultants and other service providers agree that sponsors are seeking new ways to control costs and increasingly insist on performance-based fees. The experts note "excess capacity" in the money management industry is fomenting more fee negotiation (see related story, page 20).
But despite those pressures, the survey found that fees have remained relatively stable. Only 17.5% of managers reported having changed their fees in the last five years, and they were almost evenly divided among those who raised fees and those lowered them. Greenwich Associates study found the median fee paid by funds to outside managers has held at 38 basis points since 1993; the mean fee dropped slightly to 39.7 basis points in 1995 from 40.1 in 1994.
That fee stability may change. Among the survey's respondents, 51.5% reported noticing industrywide pressure to lower fees during the last five years. More importantly, 63.3% said they expect the pressure to increase during the next five years; even 23% of managers who had felt no pressure to lower fees previously said they feel the pressure will increase in the next five years.
The fee pressure is a factor of market performance, said Mr. Hazlett. Performance-based fees are less of a priority when returns are good, but when the markets drop "you begin to wonder how to control those fees and put them in line with the return you're achieving," he said. "The manager has to earn its fees."
The survey was based on data from 140 money managers that responded to a P&I questionnaire. The sample included managers with tax-exempt asset bases ranging between $72.4 billion to $3 million; nearly all managed multiple asset classes.
