Fees charged for managing money have been coming down. This has been a long term trend which has picked up pace. A recent global survey by Morningstar shows that over the past 4 years, management fees for all active funds in their universe have shifted down from 0.68% to 0.6%. Most of this decline took place in the 2020 to 2022 period. For comparison the same survey shows fees in the passive space stabilizing around the 0.1% mark. Other surveys also show evidence of this fee compression.
KPMG note that Irish Asset managers see this reduction in fees as the single biggest driver of change in the business. The decline has been driven by greater accessibility to lower cost options such as indexed funds and ETFs. Scale players have also played a role in the downshift of investment management charges.
And it matters. These lower fee levels have meant that investors in the US, for example, saved $3.4 billion between 2022 and 2023.
Lower revenues for asset managers are coinciding with burgeoning costs. A report from the Boston Consulting Group in the US notes that costs for US managers have risen by 80% since 2010. Costs as a share of revenue have grown from 64% in 2015 to 70% today.
Some see AI as one route to tackling this cost issue. 72% of global asset managers think AI can transform their business model – but only 16% are actually working on it.
It’s interesting to note that where costs matter, they really matter. In the passive fund space the cheapest 20% in terms of fees garner 90% of all inflows.
Some investors point to performance-based fees as a way of aligning manager and client interests. But for managers this introduces a degree of volatility into their revenues which can be challenging. For those funds, in Ireland, Luxembourg and UK. offering performance-based fee structures, the average performance fee last year slumped to just 0.09%, down from 0.54% two years previous.
Have investment management fees in Ireland come down?
Well it’s clear that the trend to passive options has seen average AMC here reduce. But it is also clear that there is a wide range of fees being charged in the market-place. I looked at Active Balanced Managed Funds with the same risk rating, and very similar asset allocations, from a number of the key providers here. Management fees charged ranged from 0.7% to 1.5%. And with total expenses clearly being higher, it’s quite a gap between relatively similar options.
There has been a dramatic fall in the average fees on investment funds globally, with a lot of the impetus coming from new entrants. But there is some sense of a stabilizing in this drive to lower fees. The most recent figures show a slower pace. This is supported by comments from Morningstar that today there is more reluctance to compete on fees.
There appears to be a reasonably wide range in fees charged by Irish fund managers for what are quite similar investment strategies. Funds rarely cut fees, though new series of a fund may carry a different cost structure. But costs matter. Key investor information documents for many of the selected Irish funds show that over a recommended holding period, typical costs can siphon around 2.4% annually from returns.
If we enter a world of more modest market returns, this could start to bite.
Tradewinds 