We are preparing our 2015 asset manager survey for publication and notice some interesting trends in fee splits with agent lenders. This article provides the data on asset managers and institutional investors for Finadium research subscribers. Fuller details will be available in the asset manager report coming in July.
The securities lending market is indeed changing, and fee splits are coming down. The traditional barbell for asset managers that we used to see, with some plans paying over 80/20 (20%) in fee splits, a few paying 85/15, and more paying 90/10 or less, is disappearing. We now see a more even distribution across the three buckets. The losing category from last year is the 80/20 or greater category. Funds that have recently conducted an RFP or renegotiated fee splits are just paying less. No agent lender is yet ready to have the tough talk about the cost of indemnification so this is not showing up in fee splits. The data below cover 27 different large asset management complexes.
Pension plans show a similar trend. Our most recent data across 75 lending institutional investors show the barbell favoring the 90/10 and under category. This is a substantial change from just three years ago when it was easy to find a healthy number of institutions with fee splits of 60/40. Of course, those fee splits still exist, simply there are less of them than in the past.
Indemnification aside, the trend of tightening fee splits is likely to continue, driven by third party agent lenders who can pick off the best custodial clients for highly customized programs. Custodians are fighting back of course and are retaining market share. The fee split compression is noticeable across the board though, and this causes more difficulty for custodian lenders than for third parties. Taking indemnification into account may change the economics, but which agent will be first to tell their clients that fees are going up?