Asset managers accelerating in race to the bottom

The industry reaction to fee pressure has only exacerbated the problem, argues one report

Asset managers accelerating in race to the bottom

The problem of fee compression in asset management can be traced back to multiple causes, prompting managers to pursue different solutions. But instead of solving the problem, asset managers appear to be caught in a feedback loop as the solutions and causes interact.

A new report from Cerulli Associates looked into the impact of fee compression on asset managers in the US. The average fees for active management products have reportedly fallen across the board over the past three years, with average expense ratios across mutual fund categories going down by 9.8%.

A major tailwind behind this trend has been regulation, specifically the US Department of Labor (DOL) conflict of interest rule that focused on fiduciary duty in investment advice. While the enforcement mechanisms supporting the rule may not materialize, advisory firms handling retirement accounts have worked hard to become rule-compliant by disclosing fees.

Intermediaries that buy investments have also been forced into a more formal buying process, compelling them to look for lower-priced investments as part of their due diligence. This adds to the pressure for asset managers to lower fees, as those who don’t risk being screened out at the early stages of the research process.

“[F]ees in asset manager products are going to zero in some cases as asset managers seek to provide asset allocation for a fee while pricing the underlying components for a low fee,” Cerulli added. Through robo platforms and model portfolios, asset managers are slowly creeping into the asset-allocation space traditionally occupied by wealth management — one that advisors are increasingly willing to give up as they focus more on strengthening client relationships and scaling their business.

The trend toward automation will continue to squeeze fees in wealth management, Cerulli said, though wealth managers could also automate basic transactions and therefore bring down the costs to the client.

“The growth of asset allocation advice and digital platforms demonstrates how asset and wealth managers are using these industry trends to enter each other’s value chains and attempt to capture a greater share of a shrinking fee pool,” the report said.