Problems We See: The Impact of Fees

Investment fees are often agreed when a portfolio is first established and then remain largely unchanged for many years.

Over time, however, portfolios evolve. Asset values grow or shrink, mandates change, and investment strategies become more complex.

When fees are not reviewed periodically, investors can end up paying more than necessary - or paying for services that are no longer required.

For organisations targeting long-term returns of inflation plus several percentage points, even modest differences in cost can compound materially over time.

Understanding the true cost of investing

One challenge is that the total cost of investing is not always easy to identify.

While regulations such as MiFID have improved transparency, asset owners often still see only part of the overall picture.

Costs may arise from several sources:

• Portfolio management fees

• Underlying fund charges

• Custody and administration fees

• Transaction costs

• Performance fees within certain strategies

  
  

In many cases, these costs are reported in different ways, making like-for-like comparisons between managers difficult.

Trustees may therefore focus on the most visible headline fee without understanding the full cost structure of the portfolio.

When complexity increases costs

Another common issue arises when portfolios gradually accumulate multiple managers and strategies.

Diversification can be valuable, but excessive fragmentation may lead to:

• Higher aggregate fees

• Overlapping exposures

• Increased governance complexity

In some cases, consolidating mandates can improve both efficiency and oversight.

Fees should reflect value

It is important to emphasise that lower fees are not always the objective.

Different investment approaches naturally involve different cost levels.

For example:

• Passive strategies typically have low fees because they aim to track an index.

• Active managers charge higher fees in return for attempting to deliver excess returns, manage risks more actively, or integrate specific ESG objectives.

• Private market investments often involve higher fee structures due to their complexity and longer investment horizons.

The key question for trustees is therefore not simply how much they are paying, but what they are receiving in return.

Clear expectations around value - whether that is alpha generation, downside protection, ESG alignment, or enhanced service - help ensure fees remain appropriate.

Alternatives and hidden costs

One area that deserves particular scrutiny is the use of alternatives within multi-asset portfolios.

In some cases, alternative allocations are introduced to improve diversification or enhance returns. However, they may also increase the total cost of investing.

Trustees should therefore consider whether these allocations are delivering the expected benefits.

If alternatives are included primarily as part of a standardised multi-asset product, the diversification benefits may be more limited than anticipated.

Regular fee reviews

In our experience, many asset owners benefit from periodically reviewing their investment fee structures.

This does not necessarily mean changing managers. Often the process simply confirms that current arrangements remain competitive and aligned with the charity’s needs.

In other situations, however, trustees may discover opportunities to reduce costs or simplify portfolio structures.

Over long time horizons, even small improvements can translate into significant additional resources for charitable activities.

This article forms part of our “Problems We See” series, highlighting common investment challenges faced by asset owners.

If your organisation has not reviewed the total cost of investing across its portfolio in recent years, it may be worth doing so. Understanding what you are paying, and what you receive in return, is an important part of good investment governance.

PMCL regularly supports trustees in analysing fee structures, benchmarking managers and identifying opportunities to improve cost efficiency.