Some of the best asset managers in the world are choosing to withhold their capabilities from Australian advisers and clients because a squeeze on fees has made the market unattractive.
Zenith Investment Partners investment director David Wright said that asset management fee level situation in Australia is “acute”.
“A lot of people don’t understand this,” Wright said at a media briefing on Thursday in Sydney.
“We talk to a lot of managers coming down [to Australia]. They might have a mandate or two with a super fund or institution down here, [and they] look at the advice space and once they understand the fee environment, particularly for capacity-constrained capability, they don’t come back.”
Wright says this is “unfortunate, because some of the best capabilities of some of the global managers, we don’t get to see in the Australian market”.
He adds the adviser community “is not at all aware of that”, but “there’s a quid pro quo for forcing further compression in funds management fees – we just don’t get access to some of the capability”.
Fee compression started at an institutional level, Wright says, where issues such as superannuation fund consolidation and insourcing of asset management capabilities by those funds pressured asset managers to drop their fees to retain existing assets or win new business.
That has had a range of flow-on effects. Some asset managers that have previously been institutional-only have begun launching product into the adviser space “to try and either replace [institutional assets] or have another avenue for growth of their business”, Wright says.
But as advisers increasingly offer investment solutions to clients in the form of managed accounts, managers again run into fee pressures as advisers seek to drive down the cost of implementation and improve business efficiency.
This isn’t unusual in the advice industries, Wright says – the same thing has happened in the UK, for example.
“Certainly, one of the trends there has been the outsourcing of portfolio management, construction, reporting to investment consultants,” he says.
“Of course, that’s really quite dominant, now, with the majority of advisers having that model in place in the UK market. Of course, we’re seeing that play out here in the Australian market.”
Wright says asset and investment consultants that have traditionally worked with institutional asset managers have followed the money and begun offering services to advisers.
“You’ve seen Frontier, Jana, Mercer [and] Russell moving down into providing advice on managed portfolio services, or what we call in Australia managed accounts for advice firms,” Wright says.
Another factor putting managers under pressure has been a drop in the number of advisers practising – there simply isn’t the same volume of new funds available for investment from advised clients.
Wright says that while all of these things have driven product rationalisation in some sectors, in others there are still new offerings coming to market.
“A number of managers have been rationalising product that’s either in outflow or it’s just not growing,” Wright says.
“Interestingly, though, there continues to be also growth. I’ll probably point to things like… global SMIDs – small and mid-cap [managers]. We’ve seen good growth in the number of managers coming to the Australian market in that space.
But on the domestic front, Wright says there has been a growth in mid-cap funds because “the index-plus-a bit, active-fee charging mandate is – for all intents and purposes – dead”.
“If you want beta you can get that cheaply; if you want beta plus a bit, there’s a number of quant managers that provide that at much lower fees than active,” Wright says.
