Managers Optimize Fee Negotiation Structures to Align with Pricing Philosophy

During the past three years, the growth of institutional assets under management (AUM) in passively managed strategies has outpaced those of actively managed options, which is indicative of institutions’ desire to cut costs by paying lower management fees. This has led to many active managers experiencing extensive fee compression. In response, asset managers have implemented several strategies, including fee negotiation and internal pricing structure optimization, according to new research from Cerulli Associates.

“Managers increasingly rely on fee negotiation in order to attract new assets and retain current assets,” according to Chris Swansey, analyst at Cerulli. “Because many institutions are under pressure to meet challenging investment goals, and most institutional pricing is based on negotiation, they often have an incentive to cut costs by bringing down fees.”

Asset managers employ several different strategies when handling fee negotiations. For large asset managers (greater than $500 billion in AUM), Swansey indicates that the vast majority will employ a pricing committee—which typically includes department heads from the institutional sales, finance, investment, and legal teams—when deciding on fee discounts. “This kind of structure has the potential to boost synergies between teams, aid in thoughtful decision-making, and increase transparency,” says Swansey. “However, these committees can become burdened by the number of discounting discussions, and the process of going through a committee can take longer than some quick pricing negotiation turn-around times.”

Many smaller firms that do not use a committee give their direct sales professionals the flexibility to offer a standard pre-approved discount. If a discount is required beyond that limit, the request is escalated to one or two decision-makers within the firm. Asset managers that use this decentralized method of fee negotiation benefit from the speed and efficiency it offers. However, they do not always get the holistic insights that a committee can bring to the discussion.

Cerulli finds the strategy that managers employ is typically indicative of the manager’s pricing philosophy. “Smaller managers that are eager to gain business and lack the resources for frequent committee meetings will employ a method that allows them to act fast,” Swansey adds. “Larger, often global managers, with many different requirements stemming from legal obligations to most-favored nations (MFNs) clause requirements and ’40-Act mutual funds, will likely take the time to meet as a committee.”

Cerulli’s fourth quarter 2019 issue of The Cerulli Edge—U.S. Institutional Edition further details the impact of fee compression on risk budgets, pricing structures, and product strategies.