Asset Management Fee Compression: The Next Shoe

It was recently reported that assets in Blackrock’s Style Advantage, a factor based hedge fund, nearly doubled in the first half of 2017 to reach an impressive $1.6 billion. The fund’s performance was reasonably strong but the boost in interest is likely to have been driven also by pricing. With a 0.95% investment management charge and no performance fee, Style Advantage is one of the cheapest hedge funds available.

The success of Style Advantage is the latest indication of a broader trend among advisors to opt for lower cost investment products generally. Saving on cheaper funds allows advisors to reduce some of the pressure on their “advisor level” fees while at the same time enhancing their value by increasing their role in asset allocation and portfolio design. The availability of tech platforms offering sophisticated modeling and automatic rebalancing encourages this trend by making advisors’ “in house” production process more efficient and affordable.

The trend toward cheaper product has its winners and losers. Among investment manufacturers, the winners in traditional investments will be firms that produce and distribute ETFs and index funds at scale. In alternatives, it is likely that low cost, liquid product manufacturers will meet with increasing success if the experience of Style Advantage is any indicator. Laggards are, and will continue to be, underperforming actively managed mutual funds and SMA managers, particularly those with above average fees. Hedge funds that stick to traditional pricing but fail to shoot the lights out are also likely to suffer, especially as the availability of lower cost, more liquid options grows.

Regardless of who wins on the investment management side, on the winning side for advisors may be those who can stabilize their fees while not sacrificing the quality of their service.