The Struggle is Real: How Asset Managers are Coping With Fee Pressure

Old Fund Structures Are Making a Comeback The line between alternative and traditional asset management has started to blur. Driven by the push to increase revenue and satisfy investors’ growing interest in alternative investments, traditional asset managers are leveraging more alternative fund structures. As Kelli O’Brien, Director, Custody & Fund Services at Citi notes, “Asset managers need to continually find ways to meet their investors’ demands and this can mean using new wrappers to deliver their solutions.” The move into alternative strategies requires expanding product ranges to incorporate the use of new fund structures. In the US, this has led to a resurgence of interval funds. First introduced in the 1990’s, interval funds are closed-end funds with set redemption periods. Though comprising a small overall market share, interval fund assets are on the rise. Assets under management grew by 41% to $27.5 billion in 2018, according to Interval Fund Tracker. The attractiveness of interval funds for managers is multi-faceted: they allow more investment in illiquid assets, pre-set dealing dates make portfolio liquidity management easier, and investors have shown a willingness to pay more to access alternative investment strategies. For managers pursuing the US institutional market, in particular qualified retirement plans, another structure that has gained popularity is Collective Investment Trusts (CITs). Though the CIT structure dates back to the 1920’s, the adoption of more fund-like features, such as daily pricing, has made them more attractive. Though functionally similar to mutual funds, qualifying CITs are exempt from registration with the Securities and Exchange Commission (SEC). This means that CITs have lower compliance and administrative costs, which makes them attractive to institutional investors. The lower operating costs can also be attractive to managers because it allows for better margins. When launching new fund structures, firms need to understand the unique regulatory, operational, and servicing complexities that are involved. This may mean investing in new talent and systems, and developing new operations models. Firms should also work closely with their services providers to understand how the new products will be supported. “These products can be new to many managers, so it’s important that they have the right partners that can help them navigate the challenges,” O’Brien says. A clear distribution strategy is key when introducing new products because, as Kraft notes, “Managers will not gain assets from advisors and home offices because of these fund structures alone.” Investors need to understand the new products but, equally, managers also have to make sure there is better alignment with distributors as well. This can require a significant effort to educate advisors and the home office on the benefits of the new products. Given the work associated with launching new fund structures, firms should look to be strategic in their product expansion. “It’s important to complement your traditional funds with other strategies but you can’t be all things to all people,” Rizzo says. “While there is pressure to launch alternative products, firms should continue to focus on their strengths and core competencies.” Preparing for More Pressure The pressure on fees will remain constant for asset management and over the next few years will spread from fund manufacturing to distribution. This will be driven by market pressure as investors look for cheaper ways to access fund products, through channels like robo-advisors. Regulators will also play a part in the increasing pressure, as O’Brien notes, “Both ESMA and the SEC have indicated that they are going to look at how fund products are distributed to investors.” Asset managers should be looking to get ahead of this trend and think about how to leverage technology to reach investors directly. This could cut some of their distribution costs and enhance the customer experience. In a world where asset management is increasingly commoditized, the customer experience will become a key differentiator for firms. “Asset managers need to continually find ways to meet their investors’ demands and this can mean using new wrappers to deliver their solutions.” Kelli O’Brien Director, Custody & Fund Services at Citi