Although it is widely accepted that regulators in Asia will ban trailer fees in the future, Campbell Fleming, Aberdeen Asset Management’s head of global distribution, says a blanket ban may not be the best approach, adding that fully transparent fee structures would be preferable.
“As a matter of principle, I endorse a trailer fee ban but I’m not sure that a blanket ban is the right way to go about delivering on this principle,” Fleming says, adding that costs to investors have gone up in jurisdictions where such an approach has been taken.
Fleming says Asian investors understand “value” better than “price”. He adds that disclosing all fees would show clients the real cost of advisory services. This would, in turn, allow clients to gain a better understanding of the true value of advisory services.
“There are plenty of cases that have demonstrated that consumers in the region have an eye for brands, high quality service and good products. So rather than implementing a complete ban, I believe that full disclosure by banks about attribution of fees, be it the retrocession or the cost of advisory, will allow clients to make an informed decision about the value and force banks to further enhance their service to command the right price.
“By breaking up the individual components, it is easier for investors to price the value of this advice. If you think about other professions like accountants or lawyers, there are clear signs that people are willing to pay fees where there is value.”
Product platforms revamped
In addition to greater regulatory scrutiny and improving investor protection, asset managers are under pressure to generate alpha as markets prove increasingly difficult for active managers. A recent S&P report claims that 86% of all active equity funds underperform their benchmarks, including 98.9% of US equity funds. This, combined with a greater focus on fees, has led to an industry-wide product platform rationalisation process, with many banks opting to work with fewer asset managers.
“In the past 5-10 years, what has been evident for banks is that it has becoming increasingly difficult to maintain the quality of their product platforms,” Fleming explains.
“Many have realised how difficult it is to consistently pick the top percentile, especially while chasing a 90-day moving average. In addition to transactional costs and the amount of time required, the end result is an excessive diversity of products which, when combined, often reverts to the mean.
“But it is a much more realistic goal to develop platforms housing managers with second quartile performance or above. As a result, many private banks have chosen to build deep relationships with fewer asset managers rather than superficial ones with many.”
Although the trend of consolidation will likely place pressure on asset managers that have limited capabilities or that fail to outperform meaningfully, Fleming says there will always be room in the industry for managers that are able to demonstrate consistent outperformance or which invest in relatively esoteric markets.
ETFs have benefited from the push towards lower fees, due to their low-cost nature. These passive instruments gathered nearly US$12 billion in assets over the past 12 months, with the US ETF market alone ballooning to over US$3 trillion. But while the growth of ETFs is unlikely to reverse any time soon, Fleming has doubts about whether or not such levels of growth will be sustained.
“There several reasons for this,” he explains. “Firstly, rates are still low and longer-term schemes with liabilities will have to rely on other sources for growth and yield. Secondly, investors are starting to view the promise of index-minus-fees as not particularly exciting. Finally, there is a social perspective to be considered: is it really sensible for a society to allocate capital on an asset-weighted basis rather than to the best performing company?”
