Business model of a classical Asset Manager

There are many ways for an asset manager to earn fees in order to increase its top line. Sometimes these fees are used to remunerate other entities that may contribute to the asset manager success (ex: distributor). Asset Manager fees can be divided into 5 basic categories:

• Entrance fees
• Management fees
• Performance fees
• Transaction fees
• Exit fees

Entrance fees

These fees are payable when an investor wants to subscribe to a product. It is usually set at a pretty high level (around 5% but sometimes up to 10%) although they are usually negotiable. They can either be used to remunerate distributors that are selling the asset manager products or to cover trading costs to initiate positions that would mirror a new subscription. It is particularly important for illiquid assets as otherwise the existing fund participants would cover new entrants’ costs. If you look at real estate investment, you usually have very high transaction fees that cover some tax payments. This enable also to absorb undue transaction cost in the performance.

Management fees

This is where most of the asset managers are getting their revenues from. Their levels depend on the asset types (monetary instruments, fixed income, equities, HF, private equity …) and the investment style (active or passive). Over the last decade or so, there have been a growing interest for ETF (Exchange Traded Funds) that covers mainly passive investment. An equity ETF will charge between 10–30 bps vs 150–200 bps for a traditional equity fund. Fixed income and monetary funds have traditionally been on much lower fee levels. With the Central Bank intervention and subsequent yield compression this has been very challenging for asset managers. These management fees cover the main asset manager costs:

• Asset Manager operational costs (HR, rent, IT …)
• Distribution costs (can represent up to 2/3 of management fees for large distributors)
• Advisory costs

This remuneration structure has not been very effective for clients over the last 2 decades as asset managers are only indirectly incentive to produce performance through the assets they are managing. Most of the asset managers have historically been owned by distribution networks that had no interest in finding the best offer for their clients. These fees have been under pressure through the emergence of new investment vehicles (ex ETFs) and the poor performance of asset managers vs their respective benchmarks.

Performance fees

For a given fund, a benchmark will be defined and in case of a performance above this benchmark performance a share of this performance would be billed by the asset manager. Usually a High Water Mark is used to calculate such performance fee. Performance fees can range from 10 to close to 50% levels depending on the quality of the asset manager and the regularity of its performances. This remuneration structure is less used in traditional asset managers and more in the Hedge Fund industry. This is the fairest remuneration for the investors as the asset manager is really incentivize to perform well. However, in the case of too high a performance fee, the asset manager could be inclined to take too much risk.

Transaction fees

You may have 2 nature of transactions:

• an order within a fund for which the asset manager charges a fee to the fund. This was banned not that long ago as some were overtrading on no ground to generate more of these fees.
• when you want to transfer your share in fund, the asset manager might charge a fee although it can be supported by the entity that will welcome these assets.

These types of fees are usually marginal if any and the first one should definitively not exist any more as it has been associated with fraud.

Exit fees

Almost no asset manager charges any exit fee even though in theory it could be justifiable for illiquid asset. Once again, the one leaving the fund would have its transaction cost paid by all remaining shareholders and the performance of the fund would be negatively impacted over the long term.

As a conclusion, it can be said, that the fee structure has been evolving more in favor of customers over the last decade or so. In order to adjust to this new reality, asset managers have become bigger and leaner in order to try to maintain their operating margins. We can only hope that performance fees will little by little replace part of management fees to align investors and asset managers. That is in the best interest of customers but will require asset managers to become better performance wise.