Bfinance Investor Snap Poll: Inflation, ESG Requirements, and Regulations Contribute to Cost Management Challenges

– 34% of investors report an increase in fund servicing costs in the past 3 years.

– While 46% say like-for-like asset management fees have declined, nearly 1 in 4 have experienced an increase in ‘ad-hoc’ expenses from asset managers.

– Nearly half of investors are dissatisfied with the level of “comparability” of asset managers’ performance fees, ‘market impact’ costs and ad hoc expenses.

– ESG-related costs emerge as a pressure point.

Bfinance Investor Snap Poll: Inflation, ESG Requirements, and Regulations Contribute to Cost Management Challenges

A new asset owner survey conducted by the independent global investment consultancy, bfinance, has found that investors across the globe are grappling with cost management challenges amid persistent inflation, heightened ESG requirements and regulatory burdens. The Investors’ Costs and Fees report, dated July 2023, features data from nearly 200 asset owners (including pension funds, insurers, and endowments) in 22 countries.

The report found decreases in management fees but increases in other costs, including ‘ad-hoc’ asset manager charges and fund servicing, while the challenges of non-transparency and non-comparability remain widespread across many cost components and asset classes, with many investors dissatisfied.

Since the Global Financial Crisis, investors have benefited from cost-compressing factors including low interest rates, downward pressure on asset management fees, and improved cost transparency facilitated by regulation, industry initiatives and more. However, significant cost-additive pressures are now emerging.

In a rising cost climate, with high-interest rates, increased pressure for ESG compliance, and continuing market volatility, investors are pressured to achieve better ‘value for money’ in many areas without compromising on strategic goals. Run between 14th June and 21st June, this snap poll report aims to provide additional clarity on the views of the investor community during this demanding time.

Like-for-like Expenses

On a like-for-like basis, 34% of investors reported an increase in fund servicing costs over the past three years. The low size of these costs, relative to fund management fees, makes this increase more feasible. Regarding management fees, 46% say these fees have declined, however, nearly one in four have experienced an increase in ad-hoc expenses. ESG-related costs, and how to charge for them, are widely cited pressure points amongst investors. Further, some investors have observed higher ‘market impact’ costs following a period of market volatility and periodic fixed-income liquidity constraints.

Cost Transparency

There is a high level of dissatisfaction with transparency across transaction costs for asset owners, with only 27% of investors happy with the transparency of market impact costs and 45% for trading/brokerage expenses. In contrast, 83% of investors are satisfied with the transparency of management fees, illustrating stronger adhesion to variable market impact costs.

Cost Comparability

Even more than cost transparency, investors are dissatisfied with cost comparability. Looking at transaction costs, 14% of investors are happy with the comparability of market impact costs and 24% with trading/brokerage expenses. This dissatisfaction is also seen across management and performance fees, with 37% and 48% of investors dissatisfied with these respective costs.

Cost by Asset Class

Two-thirds of investors are broadly satisfied with both the transparency and comparability of costs in fixed income, versus just 16% in private markets and 18% in liquid alternatives. Lack of transparency is a particularly significant problem in private markets, with 44% of investors not satisfied with the current level of cost transparency.

Duncan Higgs, Managing Director and Head of Portfolio Solutions at bfinance, said:

“Although we’ve seen some investors making major strides on the subject of cost management, this report really illustrates how far the investment industry still has to go before it reaches high standards of ‘cost transparency’ and ‘cost comparability’ in the eyes of asset owners. This subject will likely come under greater scrutiny now that costs in many areas are rising – particularly in fees for fund servicing (custody, audit, legal) and various ‘ad hoc’ charges passed on by asset managers to their clients outside of the management fees. We still see real scope for investors to improve value for money, without compromising on strategic goals, in areas such as transaction cost analysis.”

Kathryn Saklatvala, Head of Investment Content at bfinance and report co-author, said:

“We are very grateful to all of the senior investors who took the time to share their insights on cost management and cost transparency in the current market – this ‘quick poll’ had a remarkable level of participation over just a few days. The data and anecdotal comments throughout this report really illustrate the extent to which investors are now facing cost-additive pressures. This is a real contrast versus the previous decade, when low interest rates, downward pressure on management fees and improved (though still imperfect!) transparency helped considerably to reduce like-for-like costs for investors.”