The ramifications of a ‘relentless focus on costs and fees’

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(pictured: Maria Wilton) 

Comment by Greg Bright

Franklin Templeton Investments Australia has let go its two most senior institutional sales people in a cost-cutting exercise. This is becoming a phenomenon among big fund managers. Do super funds understand the ramifications of their drive to reduce manager fees?

I’m not saying reducing costs for members and increasing efficiency in the industry generally are bad things. Obviously they are good things. But investors need to be aware that there is always a knock-on effect and sometimes this may not be in their interests.

At Franklin Templeton, the US-based global manager with a range of products and a long history in the Australian market, the positions of head of institutional sales, held by Keri Pratt, and senior manager of institutional sales, held by James Savage, her direct report, have been made redundant.

Franklin Templeton’s institutional and retail sales will now come under the oversight of Jim McKay, who previously headed up advisory services only. Charlie Levinge and Eddie Orchard will report to him for institutional business. The institutional client service area, under Louse Farmakis, is unaffected. The firm also has a team of retail business development mangers.

State Street Global Advisors did a similar thing this year, when it made the position of head of institutional business, held by Peter Mitchell, redundant, and combined it with the position of head of ETFs (SPDR) sales, run by Amanda Skelly.

For the biggest managers, such BlackRock and SSGA, this is happening around the world. It is also happening among stock brokers and investment banks. Business is tough and senior people are being let go. They are either not being replaced or are being replaced by less experienced but tech-savvy – and cheaper – people.

Franklin Templeton had, and still has, a healthy sized team in Sydney and Melbourne, but the move is symptomatic of a wider issue which should at least be discussed at the fund level.

Maria Wilton, Franklin Templeton’s chief executive in Australia, denies that her firm’s redundancies were to do with replacing senior people with junior ones. It was about a reduction in head count, she said.

“We need to focus on being efficient because of the relentless focus on costs and fees,” she said. “They [Pratt and Savage] are good people and seasoned professionals. It’s their positions that have been made redundant.”

There is increasing disquiet about funds screwing their managers on fees – not because investors should care about the individual managers suffering, but because they should care that their returns may start to suffer.

This is not just about the zealous activities of funds and their consultants. It is also about the ham-fisted role that the regulator, mainly APRA, has played and the results of Government inquiries, from Jeremy Cooper’s super system inquiry to David Murray’s Financial Systems Inquiry and now the recently reported on Productivity Commission inquiry.

The common theme among these inquiries is that fees should be lower. Sadly, they have to date not been much more sophisticated than that. The inquirers don’t seem to realise, as amazing as it sounds, that it is only the after-fee and after-tax returns that matter. And they don’t seem to have seen the evidence, from Chant West and other reputable researchers, that higher top-line fees often translate to higher net returns for members.

A major looming problem for super funds is that the very best managers in the world are not going to bother offering their services to Australian funds. Anecdotally, some have already started to ignore Australia in their asset-gathering activities. They are reserving precious capacity for other investors.

Pratt and Savage are both well regarded in the industry and will no doubt get by. Pratt is a former chair of and continued active driver of Women in Super in NSW and Savage is a founding director of the CFA Society Sydney, the first CFA chapter in Australia.

The CFAs are celebrating their 20th anniversary in Australia in October with a gala dinner featuring barrister and ‘Hypothetical’ television presenter Geoffrey Robertson.

Savage is helping to organise that event while considering his next move in the funds management industry.

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