Fees hot topic in profitability debate
Issues surrounding increased charges and retrocession fees are beginning to call into question the relationship between Europe’s distributors and manufacturers
With the great and good of the European funds industry gathering for the Fund Forum International, organised by ICBI in Monaco, there are several hot topics of discussion that will be spilling from the conference stage into the plush hotels of Prince Rainier’s Mediterranean seaside principality.
Panel debates will cover topics including when to outsource to external product providers and how the most efficient products can be designed to maximise alpha for investors and fee income for manufacturers.
PWM will be taking a seat in the debate on the future of the fund industry, and the key role that distributors must play, interacting with manufacturers, in order to fashion a profitable business.
The level of fees and charges will always be central to any debate on profitability. Research conducted by consultant Fitzrovia for PWM shows that total expense ratios (TERs), the only real measure of charges, are rising for the major funds sold across Europe.
The biggest funds are now charging the highest fees. This is a new development, and goes against previous trends and economic theory. Bigger funds should be enabled by economies of scale to charge smaller fees. Hence the much smaller percentage rewards for manufacturers in institutional business rather than retail business.
But the trend for groups such as Fidelity and Pioneer to levy the highest charges for the biggest, best-selling funds suggests that distributors are demanding higher retrocession fees to put the top groups on their buy-lists.
The relationship between manufacturers and distributors will always be underpinned by economics. But there is a danger that the question of retrocession fees is becoming too important a selection criteria for distributors, when choosing whom they do business with.
For clients, performance will always be the main driver, if they are to escape poverty in retirement. And they may look elsewhere if they are not getting the required returns.
Consultant PricewaterhouseCoopers has found that wealth managers are underestimating their clients’ needs when providing best of breed products. Many are offering the same as the competition rather than the best performers which the market can offer.
This may eventually lead to brand dilution, with clients associating poor performance with the distributor. Choosing a business partner should not be a decision made lightly. Banks and insurance companies moving towards an open architecture model must preserve client loyalty in order to preserve profits.
