JPMorgan Cutting Asset Management Fees to Fend Off Passive Funds


Shutterstock photo

JPMorgan ( JPM ) is one the largest and most diversified banks in the U.S., and offers services such as retail banking, commercial banking, asset management, investment banking, consumer lending and credit cards. Its main competitors include Bank of America ( BAC ), Wells Fargo ( WFC ), Goldman Sachs ( GS ), Deutsche Bank ( DB ) and Morgan Stanley (MS).

We have a price estimate of $48.87 on JPMorgan's stock, which is about 5% above the current market price.

J.P. Morgan Asset Management recently decided to cut fees on one of its equity funds in the U.K. to attract cost conscious customers who have hesitated to reenter the market due to high management fees. The fund will be the U.K.'s first low-cost, actively managed fund that will aim to catch some of the flows going to passive vehicles like ETFs or index funds that merely track an index.

The fund has an annual management charge of 0.25% and a fixed expense of 0.15% for all investors which was previously 1% for retail investors and 0.6% for institutional investors. The new fund has scrapped an initial charge of 3.5%, which was levied on retail customers but has introduced a 10% performance fees on any return above the FTSE All-share index. The total charges will not exceed 55 basis points including performance and management fees

Decline in Fees as a % of Assets

The decline in fees could be the result of high competition, or overcapacity some would say, in the asset management space and also because investors are reluctant to pay higher fees for actively managed funds that fared poorly during the financial crisis.

The growth in low-cost, alternative products such as ETF's has put pricing pressure on the industry and could reduce asset management fees going forward. We currently estimate that fees as a percent of asset under management will remain stable at its current level of 0.4% but rising competition and the introduction of more low-cost investment products could cause the fees as a percent of asset to trend below our current estimates.

Increase in Total Asset Under Management to Offset the Decline in Fees

We believe that in a low interest rate environment and as confidence recovers, investors will look to invest in the asset management industry in order to earn a greater return than what they can currently earn in bank accounts. This shift in asset allocation could produce trillions of dollars of new inflows in the coming years, which would present an opportunity for large asset managers to gross assets.

We estimate that total asset under management will increase from $1.84 trillion in 2010 to about $2.15 trillion by 2013. Low-cost investment products will boost JPMorgan's total asset under management, and it could rise to $2.45 trillion by 2013 which will offset the decline in JPMorgan's stock price due to a decline in fees.

See our estimates for JPMorgan.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: BAC , DB , GS , JPM , WFC

More from Trefis




Follow on:

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by