ClearGlass’ Chris Sier.

This article is from Dr Chris Sier, the Executive Chair of ClearGlass and co-founder of AgeWage.

Collecting data on fund management costs and charges.

ClearGlass collects client- and deal-specific cost data using the client-specific mechanism of the CTI templates. This cost collection framework was developed by the FCA working group (IDWG) to capture client-specific fee data.

Although others are using the CTI framework, ClearGlass is the only organisation to do so at scale and the only one to work with every consultancy in the UK.

CTI data differs from publicly available information, which is purchasable from several vendors such as eVestment or Morningstar, in that it requires the detailing of any special deals that asset managers make with asset owners. These deals deviate from standard published rates. Such information has never been available before for several reasons:

• Some managers have insisted on off-market rates being kept secret by clients on the basis of open-knowledge diluting the special offer. It is a form of ‘o muerta’ tying clients to secrecy on pain of losing the special discount.
• A general lack of understanding of the degree to which such special deals exist
• A general lack of understanding in the way such deals have distorted the market pricing

The degree to which the publicly available price and cost data deviates from true market pricing is shown in Fig 5 (and Fig 6) from the Analyst report.

Almost ubiquitously, managers price deals below the fees they claim they charge. The extent of this implied discount can be clearly seen when we compare ClearGlass/CTI data to information taken from a fee survey published by a well-known large consultancy. For Global Active Equity asset owners in reality pay between 14bps and 25bps less than publicly stated prices.

Some may consider this a good thing. IT IS NOT A GOOD THING, and for three reasons:

1. If an asset owner is told it is paying 70bps by its asset manager and conducts either a benchmarking or Value-for-Money exercise and through this discovers that the public rate is 74bps, it will take no action…even though the actual median fee level is close to 60bps. In fact, our data shows that for Global Active Equity, over 80% of asset owners would do nothing in such a situation (i.e. only 20% of asset owners have prices above 74bps). In other words, the signal to discuss fees with managers is missing from the market and price competition does not exist.

2.   The consultant advisors of asset owners face exactly the same issue: the signal for challenging high fees is missing and price competition fails. There is one additional twist, however. Consultants also see the fees they have negotiated across more than one client, and this collective information should give them an advantage, and it is this advantage that allows them to negotiate the above example fee of 70bps. Having done so, the consultant then claims to the client that they have negotiated an excellent deal of 5% below market rate. But the consultant only knows a portion of the market data and is not aware of the deals offered to the clients of other consultants and so is aware that the true market median is 63bps. This is best illustrated in the figure below, where the data available to one consultancy clearly reveals that that consultancy is not good at determining the best rates for Global Active Equity for its clients. The trouble is that the consultancy will not want this weakness outed to its clients and so resists transparency on the basis that it makes them “look bad” (a direct quote from a consultancy that has declined to work with ClearGlass).

3.   Managers have a different problem. When they conduct a benchmarking or VfM  exercise on their funds they routinely find out that their deal prices are lower than the public price of 74bps. In some cases, their prices are much lower given that the true median is close to 60bps. The perverse incentive is therefore to put prices up as the current price is perceived as too low. This is best illustrated by a conversation I recently had with a manager who was desperate for information on the true benchmark value for Global Active Equity as a colleague had read the aforementioned consultant fee survey and concluded that fees needed to be raised. The manager contacted me as “everyone knows the real rates are different from what is stated in public” and he felt that increasing fees would be a PR and client retention disaster.

The truth is everyone instinctively knows the true rates are different from those stated in the public domain, but no-one has an incentive to challenge them. It is likely even the regulators (TPR and FCA) are becoming aware of the situation as the statutory need for VfM reporting grows. If all asset owners (or at least 80% of them) claim they have good VfM managers when compared to median values of cost, it is just not statistically believable: only 50% of managers could be good VfM, and the TPR would have seen this eventually; the same applies for asset managers reporting VfM on their products directly to the FCA under its Value Assessment framework.

This preposterous situation, one of price stagnation at best (as a result of no signals to renegotiate reaching asset owners and consultants), or price inflation at worst (as a result of managers believing they are cheap) has gone on for far too long. How can one quantify this? Well, the quantum varies strategy by strategy and ClearGlass will be publishing further insights (via the ‘Analyst Report’ series) over the coming months to help rectify the market failure. As is stated above for Global Active Equity the difference between the public median and private median AMCs is a staggering 14bps to 25bps…or up to 30% of total AMC. The market is mis-priced by up to 30% for this strategy! Unbelievable.

However, the work we do with clients (mainly DB schemes but also a range of other institutional asset owners) holding portfolios of multiple strategies indicates that in this first round of discovery there is on average a 10bps fee discrepancy between the public and client-specific data across multiple strategies. As the average total AMC of a ‘scheme’ is 30-50bps, this means that fee negotiation results in headline costs being reduced by 10bps or 20-30%. Open-minded consultants have been instrumental to this process.

Finally, 10bps across an £8tn Institutional Asset Owner market means the implied fee saving is £8bn per annum. If you compound this over the lifetime of an investment at even a conservative rate, the total uplift in terminal value of investments could be over £1tn.

The final piece of the puzzle is to acknowledge that for every winner, there must be a loser. For the asset owners to save or recoup £8bn per annum, the asset management industry must lose £8bn of revenue per year. But this would be wrong. Only the bad VfM managers will lose. Good VfM managers will gain as they sweep up the clients of those managers too intransigent of too inefficient to budge in their pricing. Ironically, this new cost transparency will result in many managers benefitting though increased AUM and revenue, and none more so than the first movers who are willing to adopt the new paradigm of transparency.

One final point to mention is that studies have shown manager/fund prices dropping in recent years (including the LCP fee survey). However, these prices are the public prices. But because the gap between public prices and real prices is so large, you can weirdly have perceived price compression/competition whilst in reality incurring real price inflation. It is a very complex situation in which we have been held hostage.