Small funds 'forced out'

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There are claims small fund managers are being squeezed out by the increasing cost of regulation.

Monday, December 8th 2014, 6:00AM 2 Comments

by Susan Edmunds

Norman Stacey, of Diversified Investment Strategies, said the fixed costs of a small fund have risen from about $40,000 per annum to closer to $120,000 over recent years. “Fund manager licensing will be another impost.”

He said, assuming that 0.5% went to fund management, the minimum viable size for a small fund had risen from about $8 million to $60 million.

Several small funds such as 36South had closed or relocated offshore, he said.

Saturn, which recently bought Van Eyk advice, closed its last three funds in February this year.

One industry commentator who did not want to be named said it seemed that firms that had previously offered advice and their own funds were instead opting to focus just on advice. “Advice only makes more sense as it avoids the conflict of interest of pushing their own high fee funds on to client.”

But Stacey said the landscape of the industry was changing and investors were being forced to go offshore to include adequate diversity and innovation in their portfolios.

“The minimum costs favour bigger funds, as their fund size readily exceeds service providers’ minimums.”

He said the marginal costs that would be incurred by higher balances was much lower than the base thresholds charged so larger funds were very lucrative.

Stacey said it was also challenging to achieve that minimum FUM size because the number of independent advisers who might support a new fund had reduced significantly. 

“New innovation of investment products struggle to find distribution… For financial advisers providing advice, costs and demands on their time have detracted from client service, marketing and perhaps performance too. The burden of course-work, regulation, redrafting disclosure, business statements and literature to be compliant, of audits, and AML/CFT implementation over recent years, and now of  DIMS licensing has raised costs to the extent many businesses are no longer viable. Surviving advisers are actively divesting clients with balances too small to cover higher costs. This reduces the scale and potential distribution in non-aligned channels. ”

The current operating environment, including the advent of KiwiSaver, played into the big institutions’ hands, Stacey said. “Banks have multiple points of contact with investors during the year, and can seize on any one to convert and capture the client to their wares, from smaller fund managers.”

He said Aegis’ indication that it only wanted to deal with books worth more than $50 million stifled innovation and advisers with high-quality advice practices. “This predation is particularly restricting in a situation where DIMS licensing demands that Advisers use an independent custodian.”

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