The significance of fees and costs in investment management has been well documented. As individuals with savings accounts know, even fractions of a percent change in fees, can have significant impacts on the amount an investor earns from an investment. Investment fees are charged each year and just as compound interest works to accelerate savings, the same thing happens, just in the opposite direction, when investment fees compound. This can lead to hundreds of thousands of dollars of lost earnings over multiple years which can impact the amount saved for retirement, and when retirement might occur.
The impact for institutional investors is exacerbated because of the large amounts invested and the higher fee amounts paid for more complex asset classes such as private equity. For large institutional investors, the smallest savings in costs can have a significant impact. In a low interest rate environment, this is especially important and saving basis points really does matter (especially when compounded over years to come). We argue that institutional investors have significantly under appreciated the extent of fees and costs in finance, which has impacted how they invest. The Financial Crisis highlighted that, along with risks, there are a number of hidden fees and costs that investors did not know they were exposed to.
Fees and Costs in investment management have historically not been given much prominence despite their significance. Much more effort was focused on asset allocation, manager selection or security selection than on the fees associated with these activities. The GFC highlighted that certain intermediaries in the finance industry can still walk away from a disastrous situation with sizeable amounts of fee income.
The magnitude, impact and level of impropriety around fees and costs for Investors varies considerably between asset class for investors. We have observed over the last decade a seismic shift of assets from active management to passive in the public equities space, on the back of poor performance by active and hedge fund managers. One study by CEM benchmarking on the private equity asset class highlights that implementation styles with the highest cost, lead to the worst returns, based on their sample of over 240 pension funds around the world. A common argument in the industry has been that ‘you get what you pay for’, and that higher costs are thus seen as a key part of driving higher returns. As is the case with private equity above, certain data has shown that the opposite is actually the case.
Investors should no longer be happy to pay high fees for investment products, when the results that are achieved are not commensurate with the respective level of costs. More work needs to be done by Investors so that they understand and appreciate the full extent of the costs associated with the investment products they have invested in. Even small cost reductions can lead to long-term benefits through compounding of the savings.
As a result of the grave importance that investors need to place on monitoring investment management fees, we built out the cost feature in RCI, to allow investors to have a clear understanding of the fees associated with running a portfolio for an investor. We provide investors with the ability to input all of the different fees associated with their assets, across all asset classes, and project this into the future. The different tiers and timings of fees for each individual asset class can be incorporated into the system and aggregated to provide a total fund view, providing a single source of truth that can be easily and dynamically adjusted. Investors are also able to understand what the cost implications are by investing in certain assets to increase allocations towards a target. This can help investors make the decision to invest directly, to co-invest or invest through a manager. The forward looking nature of RCI allows investors to get a true, holistic appreciation of the implications of their investment decisions.
The prominent management scholar, Peter Drucker once stated, “you cannot manage what you cannot measure”. We at RCI, believe that technology plays a crucial role in helping investors measure and manage the fees and costs associated with their investment products. We think that fee and cost management cannot simply be a tick in the box exercise after an investment decision has been made. Instead, it should be core to the investment decision, as it can (and should) spark changes in the way these plans are managed, for the benefit of these plans’ members. RCI provides the tool to help achieve this.