“There is ongoing pressure on asset management fees, driven by competition, regulatory changes and the rise of passive investing,” said Liz Lumley, deputy editor at The Banker and moderator of a panel discussion on fee pressure during the Cross-Border Distribution Conference, organised by Deloitte and Elvinger Hoss Prussen with the support of FT Live on 16 May. “Fund managers are under scrutiny to justify their fees,” she added. So how far have these fees actually fallen?

Data on EU Ucits from the European Securities and Markets Authority (Esma) show that between 2018 and 2022, “ongoing costs have decreased by around 4% for equity funds and 12% for bonds funds. These figures cover total costs--including ongoing costs, subscription and redemption fees--for retail investors,” replied Jérôme Mousny, an advisor at Luxembourg’s Financial Sector Supervisory Commission (CSSF), one of the panel participants. “Further analysis revealed that between 2021 and 2022, ongoing costs for active equity funds decreased by 0.2 percentage points, while for passive funds, the decrease was 0.1 percentage points. ETF [exchange-traded funds] costs remained stable during this period,” he noted, adding that “ESG funds had similar or lower ongoing costs than their non-ESG peers.”

Mifid II a “catalyst”

For Andreas Stepnitzka, deputy director, regulatory policy at the European Fund and Asset Management Association (Efama), the Markets in Financial Instruments Directive II (Mifid II) was a “catalyst” for cost pressure. “What Mifid II did compared to Mifid I was that we went from a very paper-based disclosure environment to something that was much more personalised.” Fund managers had to have many more details on the costs that were being incurred.

Besides Mifid, there was also operational efficiency, Stepnitzka said. “Operational efficiency does increase with competition. And I think also, the use of passives with lower costs--which are inherent to them--have also helped decrease the costs.”

Mifid II is “just one piece of the puzzle,” said Mousny. “This puzzle started in 2010 with Ucits IV and the introduction of concepts like undue costs and the KID [key investor documents] and this need for transparency, which allowed the investor to compare the product.” Another piece of the puzzle is Esma’s 2020 supervisory briefing on costs and fees and how the regulator has to supervise management companies when it comes to fees. “So Mifid II is a part. But it’s not the only part.”

Value for money still “qualitative”

“With any sort of regulation or mandate, there are unintended consequences, and of course complying with any regulation incurs costs to firms. But Mifid II itself caused firms to kind of justify value for money,” said Lumley. So what exactly is value for money?

It’s difficult to define because it’s “still quite qualitative,” replied Veronica Buffoni, managing director at Carne. “And the fact that it’s qualitative makes it difficult to assess in a very homogenous manner between firms.” It’s not necessarily about having the cheapest price. “It’s about having a product or a service that effectively delivers the right outcome for a particular set of benefits.”

When firms look at value for money and costs, they have to quantify and define all the sources of costs and reconcile this with the benefits that investors get, said Buffoni. “Having a very robust infrastructure, for example, for security, allows firms to then deliver a better service ultimately, and that perhaps comes at a price that’s a bit more expensive for the customer.” But if the customer is getting the right information in a transparent manner and is able to make an informed choice, they may be happy to pay a bit more for the extra benefit.

The costs of products are often determined by the market, she continued, but on the other hand, there are increased regulatory pressures, the cost of doing business and the challenge of retaining talent. “As firms become more specialised and you have to recruit more talent, that also comes with costs.”

Efficiency, technology, outsourcing

To keep costs down, firms can look at three big areas. Point one is operational efficiency and scale. “You have to make things more efficient, you have to be bigger. And we really are seeing the rise of the mega-managers that are buying smaller managers,” said Buffoni. “When it comes to that size, we can make things very, very efficient.”

“Technology has a huge part to play, whether it’s using particular tools or certain automations that can actually help make those processes more efficient.” Specialists are needed, but there’s a lot of work that can be potentially automated, leading to efficiencies and driving down costs.

“The third point is outsourcing,” she added. “We see a lot of that in the sector, where firms are really turning to specialised providers--not just management companies--but providers of particular services, because in that way, they can fix a price and they can manage that fee and that cost, without having to build that expertise internally.”

Priips review and changes for investors

Lumley’s next question returned to regulation: how will the review of packaged retail investment and insurance products (Priips) and the retail investment strategy (RIS) package have an impact on fees?

“If you look back at the last 10 or 15 years, I think I’ve never seen at the same time so many proposals of regulation on cost disclosure being discussed at the same time,” noted panellist Emmanuel Doumas, senior policy officer, investment & reporting division at Esma. “It’s actually quite difficult to get a broad and clear picture of all of this.”

“The contents of the Priips Kid is now going to be changed,” with two main changes to highlight. There are new sections, such as on ESG, as well as changes in the performance section. “This is one of the changes that we support as Esma. At the moment, what you have is performance scenarios, which are included for all types of Priips. And for investment funds, the manufacturer of the Kid has to publish past performance on his website. And what is proposed in some of the amendments--currently being discussed at the European Parliament, in particular--is to include past performance information.”

“In the Priips review text, you have the possibility for the manufacturer of the Kid to present an interactive tool, which will allow to personalise some types of information. This is--for the retail investor perspective--a big change, because the Priips Kid at the moment, it’s a standardised document. It’s the same document for everyone.”

And “if you look at the text proposed by the European Parliament, you can see another very important proposal, which is the inclusion of what is called a fund comparator. And this is a tool to be developed by Esma and Eiopa [European Insurance and Occupational Pensions Authority] that aims at comparing some of the features, cost and performance of investment funds. And data will be taken from the Priips Kid.” This is another potentially interesting change for retail investors, said Doumas.

But this will also bring changes for firms. “Where is data coming from? If you need to add some reporting channels for all of these, of course, this will increase costs for firms.”

What about AI?

There’s cost pressure and talent retention challenges, but could AI solve these issues? “When we train up new talent, are we going to train up a new sentient AI that will not charge any fees?” asked Lumley.

“I think the value of the decision-making is human,” said Buffoni. “I’m a strong believer in that. I think AI is a fantastic tool, and AI should be used--and it’s already used by many industry players in different parts of the business and can help make the job more effective.”

“But the reality is: we cannot just delegate to AI because it’s cheaper. You still need a controller; you need the sentience, the decision-making, which is based on our experiences, our emotions and what we are experiencing and what we understand of the market and the business and the interactions in the industry. That’s something I think AI cannot learn in such a way,” Buffoni concluded. In an environment where costs are rising and “talent can be very transient, I think that’s the biggest challenge: how do you retain talent?”