No big drop in investment fees

IN PAST SIX YEARS: DESPITE REGULATORY PRESSURE

But with the market largely moving sideways over the past three years, fee pressure is growing.

at some point as the market starts moving or a larger portion of assets sit in passive, active managers will start cutting fees.”

Nedgroup’s analysis shows the rules-based market – traditional market cap-weighted passive funds, smart beta and multiasset funds that track indices – accounts for about 4% of total assets under management in the SA market.

Lower returns may also put pressure on active managers to reduce fees.

Leach says the figures don’t show that a lot of financial advisors have compiled funds of funds, as it allows them to negotiate lower fees. This doesn’t necessarily mean the end client pays less, but there’s some reshuffling in how fees are divided.

“That is definitely what’s happened in the UK with RDR [the Retail Distribution Review]… The end client is actually not paying significantly less than before, but the fund manager is getting a lot less, the platform is getting a lot less and the adviser is actually getting more.”

SA is in the process of implementing RDR.

Longer term, there’s been a downward trend in fees, Leach says. There are now investment solutions available where the advisor, platform and all other fees are included for under 2%. A decade ago, this was closer to 3%.

Discretionary fund managers compiling fund of funds for advisers are using their scale to bring down costs. As such, Leach expects margins for fund managers to start coming down. He believes shifts in the market have largely been due to regulation, especially in improved transparency.

The Effective Annual Cost standard, which outlines how costs in retail products are disclosed, was adopted last year. It allows financial advisors and investors to compare cost structures across investment products in a transparent, standardised way.

Leach believes investors will be more cost-sensitive. If a balanced fund delivers a 9% nominal return and investors must pay 2% in fees, they’ll start complaining, he says.