Contact: Wayne Walker
Deloitte
Partner - Financial Services
+61 (0) 3 9208 6916
Contact: Michael Gomersall
Deloitte
Director - Financial Services
+61 (0) 3 9208 6926
Contact: Louise Denver
Deloitte
Media & Communications
+61 (0) 2 9322 7615
In order to help manage increasing competition from shrinking margins and talent shortages, new research by professional services firm Deloitte shows asset consultants are charging fees based on the assets under management, rather than fees based on time and materials, or fixed retainers.
The Deloitte survey found traditional asset consultants are progressively moving their clients from fixed fee retainers to a model where the fee depends partly (or wholly) on the assets under advice.
Deloitte partner Wayne Walker said that the pace of change varies from firm to firm with some asset consultants taking the opportunity to increase their fees as they change the way they are levied.
The Deloitte survey found the trend was more common in larger industry funds with several already having moved to asset based fees over the past couple of years.
Wayne Walker explained the trend saying “there is upwards pressure on advisory fees due to the additional cost of research and the need to research more managers and more strategies per manager.
“Most consultants are justifying their fee increases on the basis that margins have been low and unsustainable for some time.
"Asset based fees have been the norm for implemented offers.
"We have also seen those consultants who do offer an implemented service improve that service by extending the range of options and the flexibility available to their clients,” he said.
Mr Walker added that “traditional assets consultants are also finding it increasingly difficult to attract and retain quality staff.
“Not only are these firms competing for talent with investment fund managers but some of the larger stand alone funds and industry funds are also bringing investment functions back in-house.
"The Future Fund for instance has hired some very experienced staff recently.
“We see this move to asset based fees as another way to provide traditional asset consultants with the ability to offer more competitive remuneration to attract and retain quality staff.
“But fees have to be commensurate with the value added,” Walker said.
Deloitte director Michael Gomersall noted that performance based fees are also being considered as a way to offset the dual pressures of shrinking margins and talent shortages.
“There has been a lot of talk about performance based fees in the industry, but few contracts have been negotiated with a performance arrangement despite the trend to contracts with asset based fees.
“Deloitte’s research shows that the main challenges are getting agreement between the consultant and the client on both how to measure performance and then how to attribute it between the consultant, the skill of the trustees or just plain good luck.
“In many traditional asset consulting arrangements the Trustee seeks advice but retains the ability to veto the ideas of their asset consultant.
"This makes it hard to strike a performance fee deal.”
Deloitte’s research also shows that some asset consultants have resolved these challenges by offering a lower retainer fee provided there is a performance related element built into the contract.
“How this performance fee is calculated and attributed depends on the client and the asset consultant in question.”
Gomersall points out that some firms have adopted an approach which grants them a performance fee based on the relative performance of their client’s funds versus that Fund’s peer group average.
“This outcome based approach is easier for clients to deal with and communicate to their members.
"Gomersall explains that a typical outcome could be when the Fund achieves top quartile performance versus their peer group over one, three and five years.
"The performance-based fee is only payable at the end of each period if the fund achieves this outcome.”
