Finally, the year 2018 has begun and the European mutual fund industry now faces the start of the MiFID II regulation. This new regulation puts a lot of pressure on the fund industry, especially on some of the boutiques that run smaller funds, since the additional costs might eat up a lot of the overall profits of these funds. The managers of large funds also complain that their revenues will be hit by costs coming from the new regulation, since not all of these costs can be passed on to investors. Since it is hard for small companies that already maintain very efficient operating models to increase profitability by becoming even more efficient, they might need to unlock some economies of scale. In contrast to asset management boutiques, large asset managers in Europe seem in general to have sufficient margin that, although it might be affected by higher costs, it won’t turn into a loss. So, what are possible 2018 New Year resolutions for becoming a successful and profitable asset manager?
Become more investor focused
Under the MiFID II regulation some asset managers in Europe have decided to pass research costs on to the investor as an additional layer of fees. From my point of view this is an absolute no go, since the investor already pays a management fee, which should cover all costs related to management of the fund. But in reality, the management fee is split into two parts; one part covers the costs of fund management and also contains the profit margin for the asset manager. The second part, normally quite substantial, is used to pay an ongoing service fee to the fund distributor.
Since the payment of ongoing service charges to fund distributors is under scrutiny with the inception of MiFID II, asset managers should be able to pay for the research they need from the management fee paid by the investor without there being a huge impact on their balance sheets. Otherwise, investors might feel like “cash cows” for asset managers, giving them their money to become more cash rich and in some cases without adding any additional value. In other words, investors need to think twice whether they want to invest in a fund that charges additional fees on top of an already-high overall fee for the management of a fund that may or may not deliver any outperformance.
Good examples of a more investor-focused fee structure are the recently announced new fee structures of Fidelity, Allianz Global Investors, and AB. While the last two will test their new fee structures in only the U.S. at first, Fidelity will also introduce them in Europe.
Unlock economies of scale
As mentioned above, enacting economies of scale might be just a thought exercise for small asset managers, since they normally manage a limited number of funds with a quite efficient staff base. Large asset managers, especially when they are running hundreds of funds, can easily unlock some economies of scale. The most obvious example of this would be to merge funds with similar investment objectives. In the product ranges of large asset managers, there are always a number of funds that invest in the same region and/or that have the same investment objective, such as conservative or balanced mixed-asset funds. If these funds were merged, the asset manager would be able to create fewer sales materials and would need less staff to observe and fulfill the regulatory demands. In addition, cleaning up product ranges would make it easier for investors to find a fund that suits their needs, since fewer funds would lead to lower complexity in the product ranges.
How much the complexity of product ranges affects the distribution of funds can be observed at the moment in the fact that a number of asset managers were not able to deliver the documents needed to fulfill the MiFID II requirement, meaning that a number of distribution platforms excluded the pertinent funds from their product offerings. As a result there may be no new sales at all for these products. So, smaller product ranges might help to increase net new sales, driving up assets under management in the other funds and thereby delivering additional economies of scale to the asset manager.
From my point of view, these two resolutions could help the European fund industry attract even more investors to their products. The steps might lead to further trust in the asset management industry, thereby driving future growth in the industry.
The views expressed are the views of the author, not necessarily those of Refinitiv.
