The hottest topics now in institutional asset management are ones that were barely on the agenda until the 2008 financial crisis, but still remain incompletely addressed: transparency and costs.
Both investors and regulators drive the debate. The European Commission recently introduced new regulation to ensure transparency; both the Markets in Financial Instruments Directive II and packaged retail investment and insurance-based products target increased transparency by obliging the asset management industry to disclose all sorts of detailed cost elements. Even if PRIIPS does not affect disclosure to institutional investors, it still will have an effect in increasing overall transparency for all market participants.
In June, the U.K.'s Financial Conduct Authority published its asset management market study, comprehensively listing the shortcomings of the industry and pondering the introduction of cost limits. The FCA stated the obvious: High costs do not indicate superior quality and do not generate a better performance. Conversely, high costs have a negative impact and worsen performance.
The Irish Central Bank echoed this in its own analysis, citing a lack of transparency and fees that, in many cases, were too high. This was a surprise to many, as only Luxembourg is a larger hub than Ireland for asset managers in Europe, and historically Ireland has welcomed asset managers with little scrutiny. The ICB went as far as asking for Europe-wide scrutiny into asset management costs and fees by European Securities and Markets Authority.
All of these initiatives will force the asset management industry to become more transparent about costs.
The most important question, and one that troubles institutional investors the most, is: Once transparency is achieved, how can investors actually reduce costs?
Two crucial elements are:
- Determining target costs: i.e., what does an optimal cost structure look like?
- Implementing: how to move from quantifying the gap, to closing the gap and ultimately improving net performance?