Frontier Investment Consulting has commenced talking to managers about adopting a new fee model for their businesses to break the nexus between fees and assets under management.
While there has been a lukewarm response to date, with no manager as yet agreeing to it, Fiona Trafford Walker, Frontier’s managing director, said the consulting firm would continue to work on the proposal.
“Our aim is to de-link funds manager revenue from assets under management,” she said after an AIST lunch in Sydney. “Funds management is one of the few industries which is selling hope.”
The proposal, which would turn the funds management industry on its head if widely adopted, is for managers to have their estimated costs reimbursed on a fixed-dollar basis and then earn their profits through a performance fee.
Asked what the response from managers has been to the fixed-dollar fee, Trafford-Walker said: “Some said ‘what’s that?’. Some said ‘have any others agreed to it?’ There hasn’t been much of a response.”
She said she would continue to talk about the proposal at forums and with managers, and predicted the first manager brave enough to offer a viable fixed fee would enjoy lots of goodwill and a big first-mover’s advantage.
Trafford-Walker already has support from other investors. Sean Henaghan, the head of AMP Capital’s Future Directions fund-of-funds, also mentioned the possibility of such a fee structure at the Mercer Investment Consulting conference in Sydney in April.
During her speech at the well-attended AIST lunch, Trafford-Walker said that having funds management fees determined by assets under management was a “broken model”. She said it was time for funds managers and trustees to show some leadership to move away from fees based on assets.
“How about a fixed-dollar fee, which you could ratchet up each year with inflation, and a performance fee?”
She pointed out that many managers’ businesses were suffering because of the loss of assets over the past two years.
However, she also warned active managers that they were on notice to show that they added value due to the heightened interest by clients in the active-versus-passive debate.
She supported one of her clients, Elana Rubin, chair of AustralianSuper, on the use of passive management as part of cost management for funds.
“For us, it’s all about what the value proposition is,” she said.
Rubin told the lunch that AustralianSuper could save $4 million a year through the combination of increasing its passive management (of Australian equities), having (fewer) larger mandates and reduced fees.