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October 2019, BOSTON—As industrywide fee pressure persists, it is having a mixed impact on asset managers’ gross revenue, largely depending on a given firm’s ability to increase scale. As mutual fund managers and exchange-traded fund (ETF) issuers rethink their strategies to combat fee pressure, they are using a combination of traditional and more creative tactics, according to Cerulli Associates' latest report, The State of U.S. Retail and Institutional Asset Management 2019: Recognizing Opportunity Across Client Segments.
Increased cost-awareness among investors has been a primary driver of fee compression in the retail channel. Over the last five years, investors have become better educated and more conscientious of fees. According to Cerulli’s data, in 2014, 64% of surveyed investors either were not aware of how much they pay for financial advice or felt that they received free financial advice. In 2019, this percentage declined to 45%. Competition on cost from retail direct investor platforms has been a factor in the growing investor awareness of fees. “These platforms are touting low trading costs and highlighting the higher fees of other financial companies with broad, visible media campaigns,” explains Brendan Powers, associate director of product development at Cerulli.
To retain margins, mutual fund managers are implementing new strategies to boost client acquisition and build scale to offset revenue compression from lower expenses. Asset managers are reducing expenses through temporary expense waivers, according to 67% of product executives. Another 39% state they are permanently reducing their portfolio management fees, while another 11% are reducing their transfer agent (TA) fee. Mutual fund managers are also broadening the investors eligible for lower-cost double-zero and triple-zero share classes that don’t charge sales loads, 12b-1 fees, or sub-TA fees—a strategy that could ultimately help the industry consolidate share class options and make the mutual fund more competitive with ETFs or retail separate managed accounts (SMAs), according to Powers. Lastly, approximately 80% of mutual fund managers report that they plan to prioritize development and distribution of other vehicles (e.g., ETFs, collective investment trusts) over the mutual fund, as they seek to lower the cost of their strategies for certain investors.
As is the case with mutual fund managers, 89% of ETF issuers feel the impact of fee compression and agree that they will pursue greater scale in order to offset lower fees and sustain profitability. One of the more creative ways that larger issuers are building scale is by providing advisors with asset allocation models built using their own ETFs as underlying building blocks. Another way ETF issuers can respond to fee pressure is through self-indexing. “In the case of self-indexing, managers can lower expenses by bringing index construction in-house, thus avoiding licensing fees required by a third party,” notes Powers. “This option provides the added benefit of allowing the issuer to create unique products based on their firm expertise and capabilities in more esoteric spaces.”
Cerulli believes that fee pressure is going to continue to be a reality for asset managers that provide investment strategies in both retail and institutional client channels. “Neither active nor index managers will be exempt from these trends,” suggests Powers. “To adapt, managers need to continue to evaluate the cost of their investment strategies against their peers and consider all potential solutions to address this reality,” he concludes.
Cerulli’s report, The State of U.S. Retail and Institutional Asset Management 2019, provides a comprehensive overview of the aggregate U.S. asset management landscape and is intended for U.S. asset managers, or those seeking distribution opportunities in the United States.
NOTES TO EDITORS:
These findings and more are from The Cerulli Report—The State of U.S. Retail and Institutional Asset Management 2019: Recognizing Opportunity Across Client Segments.
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