Investment advisory fees have declined for the first time since 2015, according to research from Fitz Partners.
While historically, investment advisory fees have been rising while management fees have been declining, in the latest edition of its ‘Investment Advisory Fee Benchmarking' report, Fitz found investment advisory fees have reversed the trend by declining 5% in the past 12 months.
Investment advisory fees are classed as those that are paid to entities providing advisory services to the fund. They cover asset allocation and stock selection and are usually paid out of the funds' management fees.
Overall, average investment advisory fees have fallen by 5% from 41bps to 39bps in the last 12 months but still show an 11% increase from 2015 levels, when they were 35bps. In contrast, since 2015 'gross' management fees (including distribution fees) have come down by 18%.
Fitz said the timing difference between the decline of management fees and investment advisory fees was the result of a "lack of elasticity" in fund pricing.
Fitz Partners chief executive Hugues Gilibert said: "We would have expected the reduction of the investment advisory fee component to happen earlier and be more in sync with the overall downward trend seen in management fee levels.
"The timing difference could reflect a certain lack of elasticity when it comes to the pricing of funds' investment advisory function, be it from internal teams on which their remuneration depends, pressure from internal transfer pricing rules or the strong bargaining power of sub-advisors."
He added it was good news firms were more regularly carrying out fund reviews, which would be beneficial to both the firm and clients.
"From discussions with clients, we know that fund houses are becoming more focused on these internal fees and that in-depth fee reviews are carried out more regularly.
"Fund fees benchmarking is not only a review of the level of funds costs to investors, it is also part of good business practice and stronger governance supporting asset managers' margin preservation efforts.
The share of management costs paid for by investment advisory fees have increased by 10% over the past four years. This means the remaining revenue or margin received by fund houses from management fees after any investment advisory and distribution fees has reduced.
"A substantial part of a fund management fee consists of the cost of investment advisory or portfolio management and the level of this specific cost impacts their revenues substantially.
"There is a real need for asset managers to be able to review all parts of their expenses and look even more closely to the structure of their own management fees," Gillibert commented.
Fitz Partners' research is based on asset managers' confidential fee schedules and aims to show the true cost of investment advisory fees paid to entities providing advisory services to the fund. These are usually paid out of the funds' management fees.
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