The $2trn asset manager announced on Friday it had ditched its fixed operating expense fee in favour of a variable operating expense fee, which would be capped at 0.15% for most share classes.
“Variable operating expenses will provide shareholders with economies of scale as funds grow in size,” a spokesperson from JPMAM says. “In addition, capped expenses provides certainty of maximum operating expenses both for new funds or if assets decline.”
The changes apply to all UK Oeics and were effective from 1 February 2018.
Candid Financial Advice director Justin Modray welcomes the move, but says lower AMCs are the “single biggest change” investors are seeking.
“JP Morgan’s announcement is a start, but fund expenses are usually small compared to annual management fees, where managers doggedly refuse to pass on economies of scale,” Modray says.
Morningstar director of fund analysis Thomas Lancereau says it follows similar moves in US mutual funds.
But Lancereau agrees more economies of scale are available to pass on to investors. “Management fees could be lowered with breakpoints as assets rise. Here too, there should be a cap that would protect investors from skyrocketing fees if the fund’s assets fall.”
AIC communications director Annabel Brodie-Smith says investment companies have a stronger record of introducing tiered fees as assets grow, which she attributed to independent boards of directors who look after shareholder interests.
Just this month the Monks investment trust’s board announced the management fee on assets above £1.75bn will drop to 0.3% from 1 May.
Complications
Tilney managing director Jason Hollands says most underlying operating expenses should be reasonably constant irrespective of fund size.
“So it is right to challenge whether a fixed ad valorem fee rate to cover these is justifiable or just another source of revenue on top of the management fee,” Hollands says.
FE fund analyst Tanvi Kandlur says the cap would provide assurance to investors, but she warned the variable fee structure could be more complicated to understand.
“Several fund groups including JPMAM came under scrutiny as they published their ex-ante costs in the light of Mifid II but it is also important to note that there was no uniform methodology when calculating these costs so comparisons across different funds were often futile.”
Fitz Partners chief executive Hugues Gillibert says a fixed fee model “might be simple and predictable” but is not necessarily transparent, which is what the regulator wants.
“Fixed fee models can come at a cost to the investors,” Gillibert adds, pointing to Fitz Partners’ analysis of equity funds domiciled in the UK, which showed the OCF rose to 1.18% on average from 0.99% when a fixed fee model was used.
He says JPMAM’s move aligned with the goals of the FCA that asset managers deliver value for money and act in investors’ best interests.
Modray adds: “Ideally we’d see all managers charge actual expenses to their funds or, even better, swallow them within their own management charge like Woodford. And then combine with a sensible performance style fee similar to Fidelity’s.”
Last year, Fidelity announced it was introducing a variable fee, but unlike JPMAM the fee is based on performance rather than economies of scale.
JPMAM says in its announcement all other fees and expenses would remain the same.
Pressure on fees
Kandlur says JPMAM’s move is unsurprising given pressures on fund fees and the increasing need for transparency.
Hollands agrees. “Alongside greater transparency and granularity around costs, we are certainly seeing nascent signs of differentiation in fee models, with Fidelity’s new fulcrum fee structures one example of fee innovation,” he says.
When it comes to investment companies, a third have reduced their fees since the introduction of the retail distribution review in 2013, according to the AIC.
Brodie-Smith says: “There is a clear trend for investment company boards to introduce tiered fees, where the percentage shareholders pay reduces as the investment company increases in size, enabling them to benefit from economies of scale.”
Gillibert says fees are becoming a differentiator for asset managers.
“In the past, fund fee structures were pretty much aligned across the industry but we have seen changes or re-engineering of fee structures such as JPMorgan’s move today or the introduction of fulcrum fees by Fidelity or performance fee models by others.”
