The Rising Price of Processing Managed Account Fees

TowerGroup research says managed account sponsors should consider new managed account fee solutions that can help the adviser manage clients more effectively.

As managed account sponsors grow assets under management and expand manager relationships, managing fee revenue is expected to become more complex. This year, the managed account industry is spending at the rate of approximately $20.6 million to process fees, according to the TowerGroup report. Costs to process managed account fee revenue will exceed $42.4 million by 2012 without new innovation.

TowerGroup says that costs could be kept at bay with the use of more efficient solutions. TowerGroup estimates that fee slippage among managed account sponsors can account for as much as 1.7% of gross fees, representing between $241 million and $306 million in under- or overpayments. Even with growth in the managed account market, TowerGroup predicts that the annual cost to process fee revenue could be held to $34.9 million with the use of better solutions. Priority should be placed on a solution’s ability to serve the plan sponsor and adviser rather than the manager, the firm said.

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New solutions from the account sponsor could give advisers better ability to manage clients. However, TowerGroup warns that implementing a fee revenue solution could be tough for some companies without solid data governance.

TowerGroup highlights four solutions in its report Fee Management Solutions: The Who, What and Why of Managed Account Fees: Bonaire, CheckFee, Octavian, and Redi2. As of right now, the solutions only have in total direct sales less than 15% of the addressable market share—that indicates the small portion of the industry recognizing the need for a solution. TowerGroup says the solutions that will succeed are those built specifically for separately managed accounts (SMAs) and unified managed accounts (UMAs), rather than institutional asset management.

Whatever the solution, TowerGroup calls for more efficiency in the marketplace in regards to fees. As the report says, “sponsors are setting themselves up for disaster if they continue to ignore the growing challenge of managed account fees.’

Fees Now Top Reason to Switch Providers

Spectrem Group announced that for the first time since it began tracking data in 1989, fees ranked as the number one reason defined contribution plan sponsors switch providers.

According to a press release, a new report from Spectrem Group, DC Market Needs, says nearly one-third (30%) of plan sponsors cited cost/fees as the primary factor precipitating a change in plan providers, surpassing poor service (26%) and investment issues (12%). In 2005, cost/fees finished third (18%) behind poor service (45%) and investment issues (26%), Spectrem Group said.

Eighteen percent of plan sponsors said they pay less than 1% of plan assets in fees, and 21% cited fees in excess of 2% of assets. According to Spectrem, these responses are far more realistic than plan sponsors provided in 2005, when 54% said they paid less than 1% of assets and just 4% cited more than 2% of assets.

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George H. Walper, Jr., president of Spectrem Group, said, “The newfound focus on fees coincides with increased attention paid to fees and fee disclosure by the media and regulators over the past couple of years.” (See EBSA Issues New Participant Disclosure Regulations.) “Of course, sponsors’ greater scrutiny of fees puts pressure on providers to reduce them and, consequently, may impact margins in an already competitive market segment,” he added

The Spectrem report is based on the online polling, conducted in May and June, of individuals responsible for the selection and evaluation of retirement plan providers at 1,052 companies with defined contribution plans.


The report can be purchased here.

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