essays pieces of the puzzle
Sunday, October 7th, 2012
the fee chain

MSCI got a jolt the other day after it was dropped by Vanguard as the benchmark provider for a number of its index funds.  While it was a small part of the firm’s revenue stream, the licensing of the indexes was extremely profitable.

Could this be an indication of a broader trend?  The fee structure of the investment industry has supported its own lofty margins and has provided the lifeblood for a wide range of vendors.

Not many of them are public companies.  The chart shows MSCI (its main business is portfolio analytics) and three others, of different sizes and business models:  FactSet (FDS), Thomson Reuters (TRI), and Morningstar (MORN).  All rely on the health of the investment industry and the fees that their customers earn from it.  They benefit from the stickiness of their platforms; once adopted and “institutionalized,” it’s hard to dislodge them.

Perhaps we’ll get into a rip-roaring bull market and assets under management will explode, providing plenty of fees to buy the types of services that these firms sell.  But active managers are struggling to perform and the excitement that does exist is in the passive arena.  Yet that’s the place where the fee cutting is most intense and where MSCI got tripped up.

When investment managers aren’t adding any value, can they add value by adding tools that are already in widespread use?  If fees come under pressure throughout the industry, what will happen to those that are in that chain of fee income?  (Chart:  Bloomberg terminal.)

If you’re interested in the investment business, you might look at a pair of postings about money fund woes and the trillions for the taking by investment firms that can solve that issue and others that the industry is being slow to address.