Advice-based fee model on the cards for German funds

Consultants believe that the existing fee model is unlikely to remain viable as Germany edges towards a distribution model similar to RDR proposed for the UK.

The discussion with mainstream fund managers in ­Germany about fees is a similar one regardless of who you speak to – they feel crushed between high margin, high alpha funds on one side, and cheap ETFs on the other.

Investors will pay up to 20% of profits and 2% of performance for true skill, and near nothing for ­passive products. Traditional active managers are caught in between.

One solution to this problem, says Jens Baumgarten, who heads up the asset management unit of strategy and marketing consultants Simon-Kucher & Partners, could be in the UK’s retail distribution review (RDR).

It largely replaces the practice of fund managers payingcommission to intermediaries to sell their products, with investors paying for advice on what they should buy.

“RDR in the UK is leading Europe and changing how the overall business model for asset managers changes,” Baumgarten says.

 As asset managers such as Fidelity entered Germany, they have won healthy market share by offering multiples of the standard commission rates historically paid by domestic managers. (Naturally, performance was key to keeping investors once they bought products.)

Then new threats emerged to ­mainstream domestic managers. Hedge funds and Ucits versions emerged with performance fees, while tracker funds and ETFs appeared where sales volume – not margin – was important.

“The pressure on fees is the external shock that should urge on external managers to rethink their model and business strategy,” says Baumgarten.

The battle for healthy fee income, alongside having appropriate distribution models, are the major challenges for Germany’s fund industry.


Questions ­managers might ­consider about fees are: should they tackle ETF managers by launching cheap passive funds, like Deutsche Bank has,or launch cheap active funds like Pimco did? Or should they plan alpha funds with higher margins, as DWS Investments is doing? Or, if they must ‘do more with less’, should they consider reducing their range of products?

“Target funds and absolute return fund solutions can be priced at market value, and managers can demand a ­premium,”

Baumgarten says. But he challenges managers to consider whether they should, or can, charge their distribution partners for advice and services they offer to select products, not for whichever product they finally sell.

It is a model more often employed at private banks and wealth managers, but some asset managers are already trying it by sending trained investment specialists into their distribution partners’ offices to advise end-investors.

Baumgarten says the death of the ‘kickback model’ of commissions will benefit the whole industry in the long run as it forces fund managers to listen to customers.

“When everything was based on ‘kickbacks’, you were trying to ‘price’ yourself into the heart of your ­distributors. Now you have to differentiate yourself through ­superior ­services.”

“Advisers will be forced to pay more attention to what kind of funds they are selling and what investor needs they satisfy – making it a necessity for asset managers to also be more needs-orientated in regards to their products as well as to their sales and communications strategy.”

Baumgarten says the model has already been partially successful, as some independent investors have been willing to pay for allocation advice, even where they ended up using cheaper tracker funds.

“The premium that is paid comes through advice that the distribution partner can offer then, not the product.”

One thing is clear – the days are gone when clients would pay any premium for standardised products.

“A lot of investors, including retail, do not see why they should pay a high fee for a standard product, or a more sophisticated structured product.

You have a decreased willingness to pay, and also distribution partners, e­specially important ones, who are very well aware of their importance and want a higher share of the overall revenue of the industry.”

“But now with the new regulations the main part of their fee income threatens to be lost. The manager will have to offer better funds that offer higher value, through a proposition that can be better communicated to the end-investor.”

David Walker

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