Counting pennies
07 September 2015
Small change can lead to big savings, but according to Fundsquare’s Olivier Portenseigne, in the funds industry, it’s a case of looking after the millions, and the billions will look after themselves
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Pressure on investment fund fees has never been greater. Savers are better informed than ever, there is increased competition, and politicians are pushing for a sustainable private pension system. There is a solution, as the European fund industry has the potential to make savings in excess of €900 million each year, but the key is increased efficiency in the fund distribution supply chain.
The rise of the exchange-traded fund (ETF) and the price war between index tracker fund promoters in the UK demonstrates the trend towards lower fees and costs. On top of this, the European population is ageing, requiring robust pension solutions, the European economy is in relative decline, non-European fund domiciles are on the rise, and politicians are under pressure to protect investors and maintain financial sector stability. Thanks to the Key Investor Information Document (KIID), clients are more aware than ever about fund fees, and the Markets in Financial Instruments Directive (MiFID) II will also challenge the fund distribution business model.
€1 billion savings
If the European fund industry can make some bold changes such as mutualising systems and processes, it stands to save nearly €1 billion and to improve efficiency and responsiveness. This conclusion is based on the report titled Europe’s Fund Expenses at a Crossroads, produced by Fundsquare and Deloitte. The work took an in-depth look at costs, and where savings could be made, by studying 400 funds managed by 60 promoters in six domiciles: Luxembourg and Ireland (European cross-border domiciles), France, the UK and Germany (European domestic domiciles), and the US.
Efficient models
The study found that US funds were 30 basis points cheaper than European funds, on average. One’s first thought might be that the cross-border distribution model might be largely to blame for this, given the need for multiple tax filing and high reporting fees, and the production of legally required documents such as the KIID. However, after modelling the cost of distributing to seven countries from Luxembourg, the report found the cost was around 2.3 basis points.
When a similar exercise was carried out for France-, Germany- and UK-domiciled funds, the cost tended to range from eight to 10 basis points. This is still not enough to explain the Europe-US fee gap. So, if the efficiency of distributing cross-border out of Luxembourg or Dublin is already high, one needs to look elsewhere for savings.
Market fragmentation
The US must then be more efficient due to the less fragmented nature of the distribution and servicing landscape, with low levels of processing standardisation. As well as looking at these, the report went a step further to estimate the potential savings that could result from a fundamental rethink and considerable streamlining of distribution activities. For example:
A big step up in automation could see costs of €450 million per year reduced by 58 percent. Much of this could be achieved by moving to central order management systems, replacing the bilateral links that are currently widespread.
Transfers, dividends and corporate actions processing are largely handled manually, and the total annual cost is €120 million. This figure could be reduced by 83 percent, principally by streamlining procedures of the manual, bilateral processing of transfers between distributors and transfer agents.
Most often, payments are made on the basis of one payment per order, per counterparty. However, netting per currency, counterparty and transaction type could slash cash processing costs by as much as 97 percent from the current total bill of €170 million.
Mutualisation of know-your-client and distributor due-diligence procedures could see costs of €180 million reduced by as much as 89 percent. Currently, each management company has to collect the same information and perform the same checks on each distributor. Better organisation would also increase quality.
The cost of data and document dissemination is €15 million, a figure that could be cut by 93 percent.
Improved processes would reduce errors and reconciliation costs, with a further 61 percent saving on the current bill of €355 million.
Threats and opportunities
There is now more than €10 billion in assets under management in the European investment fund sector. Many factors are pushing this growth, not least that 41 percent of European household wealth still remains in cash accounts. The industry should take the opportunity to attract and retain clients by cutting costs and reducing fees, and so moving their businesses to the next level. Then there is growing competition.
The European fund industry’s landscape is changing. The expansion of non-European fund domiciles, the ageing of Europe’s population, and demands for greater investor protection means the fund industry must be agile and responsive. Without a doubt, if the European fund industry can make some bold changes outlined in this new report, it not only stands to save nearly €1 billion but also improve efficiency and responsiveness.
The rise of the exchange-traded fund (ETF) and the price war between index tracker fund promoters in the UK demonstrates the trend towards lower fees and costs. On top of this, the European population is ageing, requiring robust pension solutions, the European economy is in relative decline, non-European fund domiciles are on the rise, and politicians are under pressure to protect investors and maintain financial sector stability. Thanks to the Key Investor Information Document (KIID), clients are more aware than ever about fund fees, and the Markets in Financial Instruments Directive (MiFID) II will also challenge the fund distribution business model.
€1 billion savings
If the European fund industry can make some bold changes such as mutualising systems and processes, it stands to save nearly €1 billion and to improve efficiency and responsiveness. This conclusion is based on the report titled Europe’s Fund Expenses at a Crossroads, produced by Fundsquare and Deloitte. The work took an in-depth look at costs, and where savings could be made, by studying 400 funds managed by 60 promoters in six domiciles: Luxembourg and Ireland (European cross-border domiciles), France, the UK and Germany (European domestic domiciles), and the US.
Efficient models
The study found that US funds were 30 basis points cheaper than European funds, on average. One’s first thought might be that the cross-border distribution model might be largely to blame for this, given the need for multiple tax filing and high reporting fees, and the production of legally required documents such as the KIID. However, after modelling the cost of distributing to seven countries from Luxembourg, the report found the cost was around 2.3 basis points.
When a similar exercise was carried out for France-, Germany- and UK-domiciled funds, the cost tended to range from eight to 10 basis points. This is still not enough to explain the Europe-US fee gap. So, if the efficiency of distributing cross-border out of Luxembourg or Dublin is already high, one needs to look elsewhere for savings.
Market fragmentation
The US must then be more efficient due to the less fragmented nature of the distribution and servicing landscape, with low levels of processing standardisation. As well as looking at these, the report went a step further to estimate the potential savings that could result from a fundamental rethink and considerable streamlining of distribution activities. For example:
A big step up in automation could see costs of €450 million per year reduced by 58 percent. Much of this could be achieved by moving to central order management systems, replacing the bilateral links that are currently widespread.
Transfers, dividends and corporate actions processing are largely handled manually, and the total annual cost is €120 million. This figure could be reduced by 83 percent, principally by streamlining procedures of the manual, bilateral processing of transfers between distributors and transfer agents.
Most often, payments are made on the basis of one payment per order, per counterparty. However, netting per currency, counterparty and transaction type could slash cash processing costs by as much as 97 percent from the current total bill of €170 million.
Mutualisation of know-your-client and distributor due-diligence procedures could see costs of €180 million reduced by as much as 89 percent. Currently, each management company has to collect the same information and perform the same checks on each distributor. Better organisation would also increase quality.
The cost of data and document dissemination is €15 million, a figure that could be cut by 93 percent.
Improved processes would reduce errors and reconciliation costs, with a further 61 percent saving on the current bill of €355 million.
Threats and opportunities
There is now more than €10 billion in assets under management in the European investment fund sector. Many factors are pushing this growth, not least that 41 percent of European household wealth still remains in cash accounts. The industry should take the opportunity to attract and retain clients by cutting costs and reducing fees, and so moving their businesses to the next level. Then there is growing competition.
The European fund industry’s landscape is changing. The expansion of non-European fund domiciles, the ageing of Europe’s population, and demands for greater investor protection means the fund industry must be agile and responsive. Without a doubt, if the European fund industry can make some bold changes outlined in this new report, it not only stands to save nearly €1 billion but also improve efficiency and responsiveness.
NO FEE, NO RISK
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