Asset managers face challenge of one-fifth cut in fund fees

Lower rates for investors may trigger closure of up to 20% of funds

Fund fees are set to fall by almost 20 per cent by 2025, sparking lower costs for investors but greater challenges for asset managers, with one in five funds expected to close. These challenges may be offset by a flight of capital into funds, boosting assets under management, as investors look to benefit from the lower fees.

According to new research from PwC, mutual fund fees will fall by 19.4 per cent from 0.44 per cent in 2017 to 0.36 per cent by 2025, on the back of sustained pressure from investors and regulators. Europe and Asia will see the greatest declines in fees, and the downward pressure means that an investor with €10,000 in a fund will pay €36 a year in management fees by 2025, down from €44 last year.

Against this background, some fund managers have even gone so far as to launch no-fee funds. US manager Fidelity Investments for example, raised almost $1 billion when it launched the industry's first-ever no-fee index funds in August 2018.

Lower fees, which compensate managers and pay for brokerage fees etc on funds, will bring more money and investors into the industry, with the research forecasting that assets under management will rise to $145.4 trillion by 2025. Ireland, as one of the largest global hubs for the funds industry, will also benefit, with Irish based assets expected to grow to $8.2 trillion (€7trn) by 2025.


Economies of scale

And managers will actually continue to improve their margins, despite the decline in fees. According to PwC, margins have improved already by 15.91 per cent since 2012, largely due to strong growth in assets under management and lower costs achieved through economies of scale.

However, the decline in fees will also mean that many funds will no longer be economically viable, and PwC has predicted that up to 25 per cent of all mutual funds in developed markets will close, although cheaper exchange-traded funds (ETFs) will grow significantly. Not only that, but PwC also forecasts one in five asset management firms in developed markets will be eliminated by 2025, either through acquisition or closure.

“Going forward they [asset managers] will need to adapt their business models in the coming years in order to win in a new environment as fees continue to fall, and improving or even maintaining operating margins will become much more challenging,” said Olwyn Alexander, global asset and wealth management leader for PwC. “Managers who are quick in adapting to the changes that AI, data and analytics, and robotic process automation will bring to the industry will see success quicker than those who don’t.”

Fiona Reddan

Fiona Reddan

Fiona Reddan is a writer specialising in personal finance and is the Home & Design Editor of The Irish Times