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Now is a great time for frank fee discussions

Now is a great time for frank fee discussions

Asset owners might be able to use the aging of the bull market to renegotiate the fees they pay to asset managers.

As reported in the April 2 issue of Pensions & Investments, consultants are seeing more experimentation in the structure of asset manager fees. This is a result of a decline in margins at money management firms as cumulative assets under management grew 6% annualized between 2011 and 2016, while revenues grew only 4% annualized, according to a recent report from Oliver Wyman and Morgan Stanley (MS). In 2017, assets under management grew 13% while revenues increased only 9%.

Asset managers thus have been under pressure to maintain their profitability, and they have so far responded by cutting back-office costs.

Given the expectations that investment returns will be lower in the next few years than they have been in the past five years, managers cannot count on continuing market-driven growth of assets under management to lift profits, and likely will continue to restructure their operations.

Asset owners should engage with their managers during this restructuring process, working to optimize practices and fees to the benefit of both parties. They should be part of the conversations as the managers experiment with new technologies, including artificial intelligence and even blockchain.

The end result might be that the asset owners can share with money managers, through lower investment management or administrative fees, any gains in efficiency they can find together.