Asset owners may have more leverage in fee negotiations with managers than they think.
Peter Laurelli, global head of research at Nasdaq-owned eVestment, compiled fee data from managers of different equity strategies and compared it to the actual fees paid after investors negotiated with their managers. He also compared the size of the allocation to the fees paid. The study found that there is no direct correlation between outperforming strategies and higher management fees.
“If you’re an asset owner, [this data] gives you an understanding of the range of fees you should expect when going through the negotiation process,” Laurelli told Institutional Investor.
In most cases, Laurelli found that public plans negotiated discounts and ended up paying lower fees than the initial account management fee. The report said this phenomenon is typical, even in commitments with managers who start with smaller initial fee agreements.
The study also found that larger allocations often come with lower median manager-reported fees. For example, Laurelli found that large-cap growth strategies charged median fees of 0.65 percent when the allocation was at $10 million. When the allocation reached $250 million, that median fee dropped to 0.45 percent. Laurelli said managers are pressured to lower their fees when the swaths of money are larger because they need to remain competitive with other managers who may offer allocators a better deal.
The same thing happened when eVestment looked at small-cap strategies. For small-cap growth investments valued around $10 million, managers charged a median fee of 0.9 percent. This fee percentage decreased as the size of the commitment increased. By the time the allocation reached $250 million, the fee was down to 0.74 percent.
The “most notable” difference in actual fees paid by a public plan and the original stated management fees occurred when there was an agreement to use a performance-based fee structure, the report said. With a performance-based fee structure, plans are charged smaller annual management fees but are required to share a percentage of the returns with the manager.
For the study, eVestment analyzed 88 public plan commitments and found that managers of half of the analyzed products said they offered a performance-based structure as an option for their clients. Forty-one managers said they don’t offer this kind of structure, and three did not answer the question.
“We’ve received requests from asset owners after seeing this report who are going through the process of trying to figure out if performance-based fee structures are more beneficial and how they can benchmark those,” Laurelli said. “That is a discussion that is ongoing among asset owners.”
Laurelli said that this data shows that if asset owners and managers agree on a performance-based fee structure, there is more room for negotiation. He said this is something that is still in the works, a process that will play out in the industry over time.
There was a single case in the study in which the fee paid was higher than the stated management fee. In this allocation, the $70 million actual commitment amount was smaller than the $100 million minimum for a separate account, resulting in a higher fee for the asset owner.
“A manager who might be attracted to an asset owner is willing to accept a lower commitment than they’re used to for the relationship, but it will come at a cost to the asset owners,” Laurelli said.