Investment management fees enter ‘new downward phase’

Investment management fees appear to be entering a new downward phase as pricing pressure spreads to private markets, according to a study from consultancy Bfinance.

Its Fee and Cost Insight series highlighted that the near two-decade decline in public market fees was moving into private markets.

While private market fees had been broadly stable at the beginning of the 2020s, public market fees had declined over the same period.

However, this stability appeared to be waning and the almost two-decade decline in public market fees may be broadening out across the wider investment management industry.

"Fee declines in the 2010s were largely driven by public market passive competition, smart beta adoption, and the low-rate environment,” said Bfinance managing director, Olivier Cassin.

“Today's pricing pressures are more closely linked to private markets performance challenges, fundraising difficulties, and evolving competitive dynamics."

Bfinance identified ‘meaningful’ cost reductions across several public and private asset classes since the early 2020s.

More than two thirds of limited partners in private markets reported ‘considerable’ fee reductions in direct lending strategies over the past three years, while almost half noted reductions in infrastructure and real estate, and 39 per cent cited lower private equity fees.

In public markets, the median quoted fee in searches for global emerging market pooled equity funds had fallen by around 13 per cent to 60 basis points.

While the consultancy also observed pricing pressure in global equities, the factors driving this were “more nuanced”, both from the funds being promoted and investor demand.

The stated fees in Bfinance private markets searches had remained broadly stable, but the consultancy found that actual fees available to investors were falling faster, driven by first-close discounts and fee holidays that do not appear in headline benchmarking data.

"Private markets are experiencing a growing divergence between stated fees and actual fees available to investors," Bfinance senior associate, portfolio solutions, Kieren Bussey.

"Managers are increasingly using discounts, fee holidays, first-close incentives and other mechanisms that may not be visible in benchmarking data. In many cases, real pricing is moving faster than formal fee schedules suggest."

Large, established institutional allocators were best positioned to benefit from greater negotiating leverage, while smaller institutions and newer wealth sector entrants had less access to favourable terms.

Furthermore, semi-liquid funds marketed to wealth clients were materially more expensive than equivalent institutional products, raising questions about value for money.

"The conversation is no longer simply about whether fees are falling," Cassin added.

"The more important question is who is benefiting, where the real savings are occurring, and whether investors have the visibility needed to assess value for money. As pricing structures become more complex, robust benchmarking and governance remain critical."

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