SWITZERLAND - Consultants have warned that calculating manager fees as a percentage of managed assets can create conflicts of interest between the pension fund and the investment manager.
In a research paper on investment management fees in Switzerland, Watson Wyatt said that although this solution was “attractively simple”, gathering assets becomes the driving success factor for the investment manager with such a fee structure. And with increasing assets under management, the ability to maintain outperformance becomes more difficult. The consultant’s comments come in the light of the first stage of the BVG Revision requirement for pension funds to disclose investment management costs.
The BVG requirement is aimed at enhancing transparency in the management of pension plans by allocating costs to their source.
The firm recommends splitting the manager fees evenly between a base fee towards the manager’s fixed costs and a performance-based fee.
Establishing a fair fee model can be time consuming, it added.
On transaction costs, the consultants said that they generally constitute the second largest expenditure item and could not be easily estimated.
“It is reasonable to expect investment managers of substantial portfolios to provide a transaction cost analysis to pension funds. Some managers will not be able to offer this but the cost efficiency of the trading program should also be of interest to the investment manager, as this can very well be a potential competitive advantage,” Watson Wyatt said.
The consultants also recommend that investment boards request detailed transaction cost statements as well as negotiate a suitable management fee based on the specifics of the particular mandate.
“Costs are of course only one side of the coin: What really matters in the end is the net performance after fees,” the paper added.
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