How much are you willing to pay for active fund management?
Incoming regulation on payment for research, proposed by the European Securities and Markets Association (Esma), has got the asset management industry worried.
The rules would ban fund managers from the current widespread practice of buying research from brokers by paying those brokers a slightly higher dealing commission than they would otherwise have done.
European regulators see this as an inducement and not in the best interest of customers, though asset managers argue it is a ‘conflict of interest’ that can be monitored.
Asset managers have pointed out that banning such a method of payment will cause the firms to have to put together their own research teams, raising costs. There are some firms that barely use broker research at all, but it seems the vast majority do, to some extent or another.
However, where the managers seem to be split is over whether these costs will be passed on to investors.
One option is for the fund groups to assume the cost of research themselves, which will undoubtedly affect their bottom lines.
Various studies have offered wildly different estimates of how much it will cost firms, but some smaller asset managers are fearful it may put them out of business, or at least seriously curtail what they are capable of doing.
The only other option being proposed at present is to add the costs into fund annual charges, probably as an extra portion of the ongoing charges figure rather than bundled into the annual management charge.
But it seems hard to believe, in the current environment of heavy downward pressure on fund prices, that investors will be eager to see the fee they are paying for funds rising.
One reader has commented that fund managers are already “being well paid for managing the fund” from the AMC and questioned why research couldn’t be funded from that fee.
Of course, investors are already seperately paying for research from the funds’ dealing costs, but it is a case of ‘out of sight, out of mind’.
There is a well-documented history of people suddenly baulking at paying up for something when it becomes explicitly chargeable, even if they have always been paying for it without realising - just witness some reactions to paying a fee for financial advice.
In the battle against passive funds, which are getting cheaper and cheaper, it may not be in the best interests for active fund managers to suddenly increase their charges.
But it looks likely that, if this ban comes into force, which will not be until the start of 2017, fund management groups will look to pass at least a portion of the costs on to investors.
And then it will come down to how strongly people believe in the ability of active management to add value, and how much they are willing to pay for that belief.
Matthew Jeynes is deputy news editor at Investment Adviser
