By Pal Sarai*
I am glad that you find our business interesting and relevant enough to communicate to Australian institutional investors. However, there are a few inaccuracies in your comment piece (Investor Strategy News, December 16, 2013). They mainly refer to our size and our business model.
1) size: bfinance is an international investment consultant with seven offices across Europe, North America and the Middle-East. We have 70 professional staff that have backgrounds in academia, asset management, banking and consulting.
2) business model: investment manager search and selection: bfinance charges the winning investment manager a fee that is expressed in basis points on assets under management transitioned by the client to the manager. No fee is payable to participate in our searches and the client does get the service at no charge. The model has been applied in over 600 searches in all asset classes for over 300 clients and representing total AUM placed of over US$100 billion.
3) Our fee is fully transparent and aligned with the client. All fees are authorised and agreed by client and fully disclosed to the manager community upfront. For example, as the size increases the amount of fee in basis points charged by the manager decreases and hence the bfinance fee in basis point decreases. Fees earned by bfinance are dependent on asset class, how much the client is investing and what fee the client expects to pay the manager after negotiations.
[The article assumed a typical one-off fee to the successful manager of 30 per cent of the manager’s first-year management fee. The example quoted by Investor Strategy News was 10bps out of 30bps for a $500 million equities mandate. We accept such a mandate is likely to have a lower management fee.]
Our fee is a small portion of the first-year fee that clients are expected to achieve after negotiations and is established ex-ante. It is expressed in basis points, so that we are indifferent to which manager is selected by the client. In practical terms, before start of any work we will sit with the client and understand the fee that clients want to achieve and actual market price. This is based on type of asset class, size of investment and type of manager (for example, quant global equity strategies are normally cheaper than the fundamental strategies). Our fee is then determined as one-off fee expressed in basis points (of the first-year expected fee to be charged by the market). In the end, it is very possible and is frequently observed that due to the very nature of our competitive process, the actual fee achieved can be lower than the market rate. This is the power of creating a true competition and inviting as many managers as possible for a given mandate.
In a nutshell, our model is completely transparent and our model ensures that we start our search for each mandate from fresh. There are no buy lists, ratings or approved list. We only get paid, when the client is fully satisfied and transfers the funds to the winning manager i.e. we have unlimited time commitment to our clients.
*Pal Sarai is a senior executive of bfinance, based in London, who presented to several super funds in Sydney and Melbourne earlier this month.