Fund wholesalers are being paid at the highest level in at least three years, according to data released Wednesday, raising questions about whether money managers can sustain increasing marketing expenses as advisers sell lower-cost products.
Wholesalers for 17 top publicly-traded asset management firms were paid more than a third — 36% — of the asset-based fees earned by those firms, according to a report Wednesday from the consultancy kasina.
That's the highest number since the firm started tracking the statistic in early 2012 when wholesalers earned 31% of the asset-based fees collected on funds in compensation and benefits. The study looked at firms including BlackRock Inc., Franklin Templeton Investments and T. Rowe Price Group Inc.
The bottom line is the cost of bringing in assets is simply too high as actively managed funds are increasingly squeezed by competition, including from index-tracking products, which tend to charge lower fees, according to the author of the report.
“We're in such a strong market right now, and we don't see companies getting more healthy; we see them getting less healthy,” said Jeffrey Strange, director at kasina. “The revenue from products is just not keeping pace with the scale needed to run a business. Looking at how the industry has moved to more low-cost products, pressure from not only platforms for the lowest cost solutions, but you also have the competition from passive products that is also putting pressure on bringing down fees for asset managers.”
By platforms, Mr. Strange is referring to broker-dealer platforms like those offered by Morgan Stanley and the Charles Schwab Corp. that offer access to funds.
But cost is also a top consideration for advisers' clients. In 2012, research firm Phoenix Marketing International, with Cerulli Associates Inc., found that 42% of investors consider costs, like expense ratio, a top factor when deciding whether to buy a fund. That was second only to their consideration of the fund's past returns.
Index funds charge about a fourth of actively managed products, according to Lipper data covering 2012. And they've bit into the market share of traditional, actively managed core holdings. Actively managed domestic equity mutual funds lost $575 billion from 2007 to 2013, while index funds and ETFs, which are primarily benchmarked, gained $795 billion, according to the Investment Company Institute, a fund industry trade group.
Yet asset management firms are seeing increasing costs, according to kasina, and the culprit is the way that wholesalers are being paid. Compensation programs are often based primarily on total sales, with less weight given to factors like the length of time the assets remain with the firm or the overall quality of the firm or advisers' relationship with the fund company.
“It's a situation where you want to bring in better quality assets and more profitable relationships and more lasting relationships — that's not how wholesalers are incentivized,” Mr. Strange said.
Many wholesalers derived more than three-quarters of their compensation from salaries and “gross” commissions last year, according to Cerulli. Kasina says between 2012 and 2014, salary and net sales decreased as a percentage of compensation, to 21% and 7% respectively, while gross sales commissions grew to 52% from 42% over that time period.
Gross sales commissions are considered a way of rewarding salespeople for their success but not penalizing them for outflows, which can be unpredictable and the result of a many causes, according to analysts and executives.
But big fund firms may be making an increasing push to “net” commissions in the mutual fund space, with wholesaler pay being increasingly tied to the profitability of the sale over the long run rather than a number more geared to short-term sales.
BlackRock, the world's largest money manager, shifted its wholesalers to a "net" number as of the beginning of this year.
"To incent someone to get a dollar of business and have the buyer hold it for three weeks is not good business for anybody," the firm's head of U.S. wealth advisory, Frank Porcelli, told Reuters last week. "We want them to focus on people who are buy-and-hold investors, people who are using our products the right ways."
Mr. Porcelli said the reaction to the change among the salespeople was mostly sanguine. BlackRock spokeswoman Katherine Ewert confirmed the accuracy of the report.