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Asset management: focus on value, not fees

Author
Raazia Ganie
Date
10 August 2022
3 min read

The age-old debate about asset management fees continues to rage, with South African asset managers under pressure from investors to justify their fees. But before you go and change funds simply to get a lower fee, it’s worth taking the time to understand what you’re paying for.

The fact is, if you’re hiring someone to manage your investments, you’re going to pay for it. Your fees don’t just cover the time and expertise that asset managers spend to select securities and manage their client portfolios. They also have fixed costs they have to cover, including administrative support, office overheads and Bloomberg screens. Management fees vary from manager to manager, but they’re generally calculated as a percentage of the total assets under management.

Fees have increasingly become a selling point in the highly competitive asset management space in recent years, says Raazia Ganie, the head of investments at employee benefits advisory firm NMG Benefits.  But the current over-emphasis on fees overlooks what’s really important: whether a fund manager is delivering the best outcomes to investors after fees. 

“It’s no use paying the lowest possible fees if your investment objectives haven’t been achieved. So, when asking questions about fee levels, make sure you are satisfied with the investment outcomes after fees. Have your investment objectives or retirement goals been achieved? Is there transparency into how your fees are used?” says Ganie.

According to a 2019 study by Morningstar Global Investor Experience (GIE), South African fee structures improved from ‘above average’ to just ‘average’ compared with the rest of the world. But when it comes to management fees, it’s not obvious what constitutes cheap or expensive.

For a start, different markets and funds calculate and report fees differently, so it’s hard to compare like for like. And then different types of investments have different fee structures, depending on a range of factors. For example, comparisons become particularly difficult when fees are linked to performance through generally complicated formulas. Investment management fees for active management are typically higher than passive, or index, management, which is another factor to take into account when making comparisons.

It’s also broadly accepted that investors should be happy to pay higher fees to managers that deliver more consistent outperformance. “If two managers provide the same level of excess return, but one does so by taking less risk, should investors be comfortable to pay higher fees to this manager? Should fees automatically reduce as assets under management grow? It’s important to understand nuance and context before simply looking for the lowest fee,” says Ganie.

Part of the Great Fee Debate centres around the fact that technology now plays a major role in the investment industry by allowing investment managers to improve efficiency, reduce risk and scale much quicker. But Ganie believes that while digital algorithms are a valuable tool for asset managers, we’re some way from replacing analysts entirely, as the human touch remains important in investing.

“The bottom line is we should focus on value, not price. And if you have any concerns about your current fee structure, you should be talking to your financial adviser, and getting the fullest possible picture before making any investment decisions,” she says.


T&Cs apply. The NMG SA Group of Companies are authorised financial services providers t/a NMG Benefits.

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