Trustees warned to brace for higher FM fees
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Median fees for fiduciary management have fallen by 30% since 2017, a new report by IC Select shows, but the FM oversight firm warns managers have started to prepare clients for future increases.
Over the six years to the end of 2022, base fees fell by between 10% and 28%, while investment fees have fallen by 38%, according to IC Select’s FM fees survey 2023, with responses from Aon, BlackRock, Cardano, Charles Stanley, Goldman Sachs Asset Management, Legal & General Investment Management, Mercer, Russell Investments, Schroders Solutions, SEI, Van Lanschot Kempen and WTW.
The drivers differ for reductions in base and investment fees, the report also found. While 80% of the fall in base fees happened between 2017 and 2019 amid regulatory scrutiny and increased competition, more than 60% of the fall in median investment fees happened in the last two years, because of a fall in asset values.
This reduction might have been as much as 20% for schemes with liability-driven investments, said IC Select director Roger Brown. Where fees are calculated as a percentage of asset values, they will therefore have reduced in line with this, although IC Select expects fees to rise once more as markets recover and managers look to invest in more expensive assets.
In addition, he said fiduciary firms are seeing staff costs increase through higher wages amid high inflation.
“Margins are going to be squeezed. Then it depends on how long they are prepared to sustain lower margins before fees go up. Some managers are already talking to clients about putting up fees,” said Brown.
In 2016, the Financial Conduct Authority said asset managers had benefitted from high margins of 34% to 39% between 2010 and 2015, but Brown believes that for fiduciaries, most of this has been eroded and could even be negative in some cases.
In addition, not all pension funds pay percentage fees – some have a flat fee structure. He said schemes will tend to pick one or the other depending on whether they expect their asset base to increase or reduce.
“If they are happy with the service they got... there is an element of having to accept [higher fees],” said Brown.
The main thing for trustees is to go through a proper selection process, receiving several quotes, he advised, although he admitted it can be difficult to compare them because the asset allocation will differ from manager to manager. This also means the lowest quote does not necessarily offer the best value, he stressed.
“Once you are with a manager, get regular reviews of fees,” he added, looking at fee surveys or hiring an oversight firm. “It doesn’t have to be a full market testing exercise."
Although fiduciary management has hardly seen any client growth overall as schemes buying out offset new clients, Faye Clark, head of manager research at consultancy XPS Pensions Group says the FM model remains appropriate for the right scheme.
“Fees is a component of the overall decision of whether or not to use a fiduciary model, but many other factors feed into this too, such as governance,” she noted.
She agreed that to get ‘a good deal’, trustees benefit from the legal requirement to undertake a competitive tender when first appointing a fiduciary manager and every five years.
Recent market changes highlight the importance of regular reviews, she added.
“What was a good deal three years ago may not be a good deal today,” she said,
However, understanding if the manager provides a good deal can be hard in an opaque market.
“You know how much you are paying for something, but you won’t know what someone else in a similar situation might be paying over the road. Having advice to provide that broader insight and share experience can be helpful to provide perspective,” she said.
The layers of fees in fiduciary management can also differ from the standard asset management fee, as they include both FM fees and those for underlying managers, which can include performance fees, said Clark. There can also be transaction and other costs.
“Trustees can sometimes be surprised by the underlying manager fees when they get under the bonnet - private market assets being much higher than anticipated combined with lock-ins for example."
Has your fiduciary manager mentioned increased fees?
