Negotiate harder and be prepared to walk away if you cannot agree a fair fee structure that meets your needs, Fiona Trafford-Walker of Frontier Advisors told delegates of the Australian Institute of Superannuation Trustees Australian Superannuation Investment conference.
She said the growing size of mandates was not being properly matched in lower fees. To make her point, she showed a model in which a manager running $1 billion of assets made a profit of $200,000 after fixed costs had been taken into account. She contrasted this with figures showing a profit of $17.8 million for a fund manager after an only slightly larger amount of fixed costs were taken into account for $6 billion of funds under management.
She pointed out that fund-manager pre-tax profit margins were currently at 32 per cent of revenue, their highest since 2013.
“Fees have come down in recent times but not significantly,” Trafford-Walker said. “But mandate sizes are around 10 times the size of what they were 10 years ago. There has not been a commensurate fall in fees for this growth.”
The biggest profit margins with scale come from managing equities, bonds and cash.
She urged funds to write to their fund managers and ask for fee reductions and that such requests should come with the belief that the fund would walk away if the manager declined to negotiate.
She backed a flat dollar fee plus a performance fee as the ideal arrangement, but said this was largely only being accepted by new managers.
Delegates in the session were asked if they had negotiated fees with fund managers in the last year and, if so, how much had they fallen by at the total fund MER level. The responses were that 83 per cent had seen reductions of less than 5 per cent, while 17 per cent has seen reductions of 5 to 10 per cent.
Sam Sicilia, chief investment officer of HOSTPLUS, who also spoke on the panel, said that in some instances he had received unsolicited offers of fee reductions from fund managers.
Some of this was due to the managers having reduced fees for similar clients after negotiation, while others were explicit that they wanted to make it unattractive for HOSTPLUS to consider managing the assets in house.
Sicilia spoke of conversations he had with fund managers in New York and London on a visit sponsored by the Victorian Government to convince managers to set up in Australia. He had bluntly told managers about the tough approach to negotiating fees in Australia. This had put some off setting up here, while others revealed they had one fee schedule for Australia and a different one for the rest of the world.