Median investment fees for fiduciary management fell by over 50% in the last five years due to increased market volatility, according to findings from IC Select.
IC Select’s latest fee survey of fiduciary management firms in the UK draws on the data from 2018 to 2023 and examines two primary cost components in fiduciary management: the base fee, charged by the fiduciary manager, and the investment fees, which include underlying manager fees, administration, and custody costs. Together, these elements reflect the total investment cost.
The survey found that base fees have decreased by 2% to 7% per year from 2018 through 2022.
IC Select’s report added that base fees have stabilised in 2023 for larger funds but saw an increase for smaller funds.
The investment fees, meanwhile, fell by over 50% in the past five years, with over 70% of this reduction occurring in the last two years due to increased market volatility.
This means that the total fees saw a median decline of 40% since 2018.
Benefits of scale
One of the benefits of fiduciary management is that, for most schemes, client assets are pooled for investment. As a result, the costs of investment are reduced for all schemes.
Furthermore, a £50m scheme can expect to pay the same investment costs as a much larger scheme if their objectives and situation are similar, IC Select noted.
Although smaller schemes can expect to benefit from this effect more than larger schemes, the pooling of investments will generate significant savings in investment costs for all schemes compared with schemes that follow an advisory approach, it said, adding that these savings will still apply where schemes’ situations differ, as fiduciary managers often create several ‘building block’ funds based on asset types.
“The asset allocation across these ‘building block’ funds is then customised for each client to meet their specific needs, ensuring that the benefits of pooling are still achieved. The scale of larger schemes, with assets greater than £500m, means that they often use segregated funds or a combination of ‘building block’ funds and segregated funds as their scale allows,” according to the report.
“Consequently, their investment costs will often vary from the model fund costs. Where pension funds need to achieve a higher investment return, more growth assets will be used. As a result, they will have more investments in equities and, possibly, private assets. As these funds are associated with higher investment costs, the cost will increase as the objective increases,” it added.
Competition
A significant driver in the fall of fiduciary management fees has been price competition between fiduciary managers as they have sought more cost-effective ways to implement investment strategies, according to IC Select. This has involved the use of more passive and quasi-passive approaches and replicating asset exposures using derivatives, it added.
“In our experience, the standard fees quoted by fiduciary managers are always higher than the actual fees that can be negotiated. However, observing trends in standard fees provides useful insights into how fees change over time, by size of fund and by the investment objective,” IC Select said in the report.
Peter Dorward, managing director at IC Select, said that “tracking trends in these fees provide valuable insights into the direction of costs over time and across factors such as fund size and investment return objectives.”
Read the digital edition of IPE’s latest magazine
No comments yet