Asset manager fees in a race to the bottom

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It isn't easy out there for asset managers.

As if volatile equity markets aren't complicated enough to deal with, independent asset managers are also struggling with the tough competition created by substitute products, such as exchange-traded funds and the big banks' in-house funds.

Not only must the independents console investors enough to keep them from running scared, they must also be extremely mindful of fees to keep themselves competitive – especially relative to dirt cheap ETFs.

With that in mind, IGM Financial has become the latest firm to slash management fees, announcing just before the long weekend that its Investors Group subsidiary will cut fees by 5 to 40 basis points on about two-thirds of its assets under management. The changes will be implemented in July.

The plan, according to IGM, will hurt cash flow at first, but should convince more investors to park their money with Investors Group over the long haul.

That makes sense in theory, of course, but there are some who think the benefits will take a long time to materialize. "While we believe it's possible that the lower fees could have a positive impact on consultant network growth and may improve gross redemptions, we doubt that the lower fees will translate into higher sales in the near to medium term," noted BMO Nesbitt Burns analyst John Reucassel.

Scott Chan at Canaccord Genuity is less optimistic, predicting that future sales probably won't offset the lower fees because industry competition is only going to get more stiff.

Still, the consensus among analysts is that IGM wasn't crazy to bring its fees down in line with its peers because they were already too high. However, they haven't commented on whether the independents combined are competitive enough. Everyone wants a piece of the Canadian asset management market, and some players will be ruthless on pricing to get their slice.

Luckily for IGM, they're still in good enough financial standing to weather a near-term hit. As Mr. Reucassel noted, cash flow is projected to be $1.1-billion in 2012, giving the company more than enough room to pay $570-million in dividends and $270-million in cash commissions this year.