Fund managers call for fees overhaul

By Claire Milhench

MONACO (Reuters) - Asset managers have called for an overhaul of the industry's fees system in a move which could signal the death of the so-called "pay-to-play" model, blamed for distorting the advice given by financial advisers.

Industry insiders at the Fund Forum industry conference here think client and company interests would be better aligned if the financial advisers and banks who sell fund products charge clients directly for advice.

Most advisers and banks -- which distribute fund products -- still rely on commissions, raising questions about their independence. But the fall out from the financial crisis has hardened the consensus among fund managers that change is needed.

Fund managers have also voiced a need to improve transparency in their own fee structures if trust is to be restored after the failure of active managers to protect client capital last year.

"You shouldn't be able to get very rich if your client gets very poor," Elizabeth Corley, CEO of Allianz Global Investors (ALVG.DE) in Europe, told delegates to the Fund Forum this week.

Active management, as opposed to index-tracking or passive management, generates higher fees and commissions and assumes an ability to produce stronger returns or narrower losses.

Peter Preisler, head of EMEA at T Rowe Price Global Investment Services (TROW.O), said the existing fee structure had allowed underperforming active managers to stay in business.

He, and others, blame the "pay-to-play" model, where asset managers must pay a fee to appear on a distributor's list.

"Pay to play was abused," said Richard Royds, managing director for global strategic clients at BlackRock (BLK.N). "Low quality asset managers got on to distribution platforms for the wrong reasons -- just by getting out their cheque books," he told delegates on Monday.

Some two-thirds of costs associated with UCITS funds -- the main mutual fund vehicle in Europe -- are associated with distribution, but this is not clear to the investor. About 80 percent of primary distribution in Europe is commission-based.

Preisler said the incentive to the sales person has very little to do with the quality of the product, and a lot to do with the compensation. "Under a fee-based advice model however, the intermediary is forced to take the client's goals seriously," he said.

He estimated more than 50 percent of investors' fees for mutual funds goes to advisers who are supposed to give advice and help with financial planning. "They don't," said Preisler. "This needs to be more transparent."

(Editing by David Holmes)