REIGATE, England -- Byzantine fee schedules charged in overseas pension markets can make it tough for the best U.S. money managers to succeed abroad.
Fee schedules charged by U.S. managers generally are more straightforward and consistent than those charged by local competitors, appearing relatively high compared with costs around the globe. Their competitors, while offering seemingly lower schedules, often have hidden fees, such as brokerage and custody costs, which inflate revenues and greatly boost total money management costs.
Despite moves toward globalization, money management fee schedules remain remarkably different across major pension markets, and often are opaque and subject to heavy discounting, said Philip Robinson, head of research for Watson Wyatt Worldwide's global asset study, which has just issued a report on the subject.
In some countries, such as France and Germany, basic money management fees are far lower than those charged by foreign providers -- as little as 10 or 15 basis points for global equity portfolios -- but are greatly enhanced by in-house brokerage and custody costs.
German managers churn portfolios through internal brokers at the end of the quarter to drive up revenues, both German and foreign managers have said.
Swiss managers also tend to charge "all-in" fees that are very opaque, according to the study.
U.S. money managers said in interviews that they have had to walk away from overseas business when faced with unrealistically low fees charged by local competitors, they said in interviews with P&I.
James Stewart, senior vice president and director of marketing for Capital International Ltd., London, said some European managers have offered to take on business for nothing, while some U.K. pension funds have sought to pare fees. "We have walked away from business both here and in continental Europe," he said in an interview.
David Puddle, senior vice president and marketing director for Putnam Europe Ltd., London, said one European prospect balked at paying Putnam's fees for a U.S. equity portfolio, saying the domestic bank was charging only 10 basis points.
The reality is the bank churned the account with its in-house brokerage arm, racking up 25 basis points a year in transaction costs, while Putnam's execution costs were only one-tenth of that amount, Mr. Puddle said.
But the mind set of local pension executives sometimes prevents them from paying U.S.-style fees.
"Writing a check for five to 10 basis points doesn't hurt as much as writing a check for 40 to 70 basis points," Mr. Puddle said.
Discount for balanced
Fee discounting also is rampant outside of the United States, the Watson Wyatt study shows. The level of discounting is highest on balanced mandates while less obvious on global bond portfolios, where fees tend to be much lower.
The study found discounting was highest in Germany, Ireland and the Netherlands.
One French manager, who asked to be unnamed, explained his firm was charging one institutional client only 30 basis points for a $20 million Asian equity mandate, and another client only 8 basis points for a similar $200 million Asian equity brief.
"But this is a bank. There's no bottom line. Anything they lose they screw out of their retail base," he said.
Overall, total management fees have dropped considerably since Watson Wyatt last studied fees four years ago, falling between 20% and 35% for balanced portfolios, 10% and 25% for global equity briefs, and 5% and 30% for global bond mandates. The study predicts further pressure on fees in coming years.
U.S. fees rank high
In contrast, American money managers charge U.S. pension clients relatively high fees and engage in little discounting, the study found. That's because many U.S. public and corporate pension funds employ "most favored nation" clauses that require managers to give them the lowest fees they offer to any client, Mr. Robinson said.
In addition, U.S. pension funds appear more willing to "pay up for what they view as superior management," he said.
The study also found that in all markets except the United States, global providers charge higher fees than do domestic competitors. That's because most of the global providers are U.S. or U.K. managers, which tend to charge higher fees, Mr. Robinson said. "And when they go into other markets, they take their domestic fee quotes with them," he added.
"We believe we're offering a higher quality product, (which) has a higher cost base," said Charlie Metcalfe, executive director at Goldman Sachs Asset Management, London. "When you're selling a Mercedes, you don't sell it for the same price as a Ford Fiesta."
In contrast, non-U.S.-based managers tend to charge lower fees to U.S. pension funds than do their American counterparts because they are trying to break into the lucrative ERISA market, Mr. Robinson said.
Japanese pay more
Japanese pension funds are increasingly willing to pay up for specialist portfolios, Mr. Robinson added.
"Japanese pension funds are so hopping mad with what they have gotten from their domestic providers that they are quite willing to pay higher" for foreign managers, he said.
It's far tougher for foreign managers to break into the market for balanced portfolios around the world. Pricing for such portfolios -- those covering both domestic and international stocks and bonds -- can be cut to the bone by domestic managers.
In the United Kingdom, money managers have been willing to discount fees heavily to hold onto business after experiencing poor performance. And Dutch money managers engage in "kamikaze pricing" for balanced portfolios, sometimes charging 10 to 12 basis points for relatively small portfolios, Mr. Robinson said.
Europe's 'dirty' fees
But the problem of bundled or "dirty" fees -- in which hidden charges for brokerage and custody drive up total management costs -- still plagues managers trying to break into continental Europe.
In fact, it makes it much tougher to gather data on the total costs to plan sponsors in such markets, the study says -- often because pension executives themselves don't know what they are being charged.
That's why total fee data for some of these markets might be understated in the study. For example, the study shows total expenses for a $100 million global equity mandate are only 84 and 88 basis points in France and Germany, respectively, while running 121 basis points in the United States.
A number of markets, however, have been moving to cleaner fees during the past five years, notably, the United Kingdom, Australia and Ireland, and to a lesser extent, Hong Kong, Canada and the Netherlands. Switzerland, France and Germany remain recalcitrant, Mr. Robinson said.