Institutional investors can lower both standard and performance related management fees by about 5% by actively negotiating with their fund managers, bfinance said.

In their third major global fee study, the company found that there was a significant reduction in initial fee quotes to ones actually charged. The fund managers which had been shortlisted by bfinance after quantitative and qualitative analysis made significant improvements to fee structures in open competition with other managers up to the final decision.

The financial services firm said that institutional investors should make fund managers compete in an independent process. An analysis of two case studies showed the benefits of this approach. With a reference portfolio of £1 billion and an asset allocation that is representative of UK institutional investors, the cost of fund management can be reduced by around 5% if the investor chooses to optimise its costs by limiting the number of mandates.

The same investor who chooses to use several active fund managers for diversification purposes could achieve far greater cost reductions by placing investment managers in an open and transparent selection process that encourages negotiation. Based on fee negotiations noted on a range of asset classes in the searches carried out by bfinance, the reduction in costs exceeded 26% across the entire outsourced investment management portfolio.

Commenting on performance related fees, Olivier Cassin, managing director, head of research and development at bfinance, said: “Performance related fee structures are by their nature interesting, as they align the interests of investors and managers, but investors, with the help of their consultants, must systematically seek to rebalance the structure offered by the fund manager in their favour.”

The study looked at 50 mandates relating to typical investments in international institutional portfolios with findings based on almost 1,200 price quotes from 350 fund management companies.

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