Callan Reports Most Investment Management Fees are Down

October 6, 2009 ( - In aggregate, investment managers report that fee revenue has declined each year since 2006, and both fee revenue and pre-tax profit margins are estimated to fall in 2009, according to Callan Investments Institute's 2009 Investment Management Fee Survey.

The survey report said that across traditional asset classes, published fees increased for actively managed U.S. large cap, small cap and non-U.S. equity products for larger account sizes but declined for U.S. broad market fixed income strategies relative to 2006. Published fees for passively managed U.S. and non-U.S. equity portfolios were down slightly since 2006, while passive fixed income fees held steady during this time period.

Actual fees for active U.S. large cap, small cap and non-U.S. equity portfolios declined for the largest accounts relative to 2006, whereas fixed income fees were flat over this period, according to the report. On average, actual large cap U.S. equity fees represent 85% to 90% of published fees, and actual small cap and non-U.S. equity fees comprise 83% and 70% to 75% of published fees, respectively.

Actual U.S. broad market fixed income fees – which declined the most among the asset classes examined in the Callan survey – represent 70% to 85% of published fees.

Callan found performance-based fees are growing in popularity as an alternative to standard fee schedules. Fifty-nine percent of fund sponsors use performance-based fees for at least one account and 64% of managers offer them.

The vast majority of investment managers indicated they infrequently alter their published fee schedules: 80% of respondents report making changes no more than every two to four years and one-fifth indicate they never change their published fees.

Thirty-one percent of investment managers do not give fee discounts to clients for whom they manage multiple portfolios, up from 21% in Callan’s 2006 survey. More than one-third of investment managers provide a “relationship discount” by applying a discount to the sum of all individual fees.

Callan said perceptions of value-added for fees frequently mirror the performance of the broad market. Fund sponsor perceptions of value-added for fees paid are down substantially from 2006. Fifty percent feel their fees are justified and 33% indicate that industrywide fees are justified, versus 71% and 47%, respectively, in 2006.

The greatest fee-related concerns cited by fund sponsors are ensuring that fees paid are competitive with the marketplace; that different fee structures used for alternatives are aligned with fund goals and are reasonable; and whether active managers are providing the value-added needed to justify fees. Investment managers' top concerns relating to fees are fee and margin compression, especially given lower asset values and higher operational costs; fee consistency given most-favored-nation arrangements; pressure from lower-fee strategies and distribution channels; and performance-based fee arrangements.

Callan said investment manager fees represent nearly 88% of fund sponsors' cost of doing business. Nearly one-third (31%) of fund sponsors said they review fees annually while 17% never review fees.

Consistent with 2006 findings, fund sponsors negotiate fees with 66% of their managers on average. Across asset classes, fund sponsors and investment managers report the most frequent fee negotiations in U.S. large cap equity and core fixed income.

Over the next 18 months, fund sponsors expect to consolidate the number of managers in U.S. small, mid and large cap equities and U.S. core plus fixed income. Investment managers reveal few intentions, if any, for product consolidation.

Fund sponsors intend to add managers in global and non-U.S. equities, other fixed income, real estate, private equity, hedge funds and hedge fund-of-funds, while managers foresee the greatest opportunity for product expansion in global equity followed by real estate.

Forty fund sponsors and 160 investment management organizations provided detailed fee practice information and data on 14 asset classes. Results were supplemented by actual and published fee information sourced from Callan's Fund Sponsor and Global Manager Research Databases and industry sources.

To order the full survey, contact Anna Wagner at 415-974-5060.