A good starting point for any system is to conduct a special workshop on fees, how they work, what the plan is paying both visibly and invisibly, who is responsible for management and oversight and which fees for which strategies would be targets for further study. The focus should be educational first, then focus on governance and reporting/accountability. The workshop should set the stage for an ongoing oversight function that identifies opportunities for future improvement in fee structures and empowers the staff to negotiate more effectively.
A written fee policy can address questions such as:
- How should trustees discharge their oversight responsibilities with respect to fees?
- What kind of fee reporting should trustees receive and how frequently?
- What parts of the portfolio are best suited for passive management?
- Which are best suited for internal management?
- What strategies require external managers that seek to outperform a well-understood market benchmark vs. an absolute-return or expectational performance target?
Annual Fee Report
An annual fee report (AFR) can provide transparency and establish accountability for compliance with contractual fee arrangements, but most importantly can provide context for fee differentials in light of recent investment performance. The AFR can link directly with periodic assessments of risk-adjusted investment performance, to provide a comprehensive perspective on which parts of the portfolio are contributing alpha and not just beta and whether the fees paid for those services are properly aligned. We generally advocate that staff should provide ongoing reporting and analysis of fees, but FAS can enhance the work product by collaborating with trustees, senior management, investment consultants and staff to craft an optimal fee reporting template and implement meaningful communication and oversight practices.
Fee Management Capability Assessment
A Fee Management Capability Assessment (FMCA) is a holistic process review of staff’s current practices in screening, negotiating and managing fees, the system’s governance and oversight structure and practices, consultants’ fee consciousness, and strategic opportunities to restructure fees prospectively. The objective of a FMCA is process improvement, team-building, improved transparency and smarter strategies (not fault-finding or finger-pointing). In some cases, the FMCA may produce forward-looking strategies to streamline, adjust or re-focus the portfolio if fee drag is impairing returns in certain asset classes.