Asset managers pay vastly unequal fees for using indices

Index providers charge some asset managers 13 times as much as other clients for similar bundles of products and services, according to research into the opaque pricing models that could lead to higher costs for investors.

Trillions of dollars are benchmarked to financial indices, but the costs paid for access to them remains a tightly guarded secret. Index providers often bundle products and services, which makes accurate like-for-like comparisons problematic for asset managers to find.

Regulators have stepped up their scrutiny of index providers. The UK’s Financial Conduct Authority is soon to publish the results of an investigation into “unnecessarily complex licensing arrangements” and barriers to switching between benchmarks that could result in price increases for users.

The research by Substantive Research, a consultancy, found that prices for indexing licenses for similar bundles of products and services varied by up to 13 times. The research was based on data from 40 investment managers that oversee combined assets of $5tn.

“Index licensing costs can vary widely depending on the terms of the contract. Index providers also cross-subsidise across their ranges so a user might get a discount if they buy another product or service. But the application of discounts also appears to be inconsistent, which makes it difficult for users to know ‘how well am I doing?’ compared with my peers,” said Mike Carrodus, the chief executive of Substantive Research.

Alan Miller, chief investment officer at the London-based wealth manager SCM Direct, which specialises in building index-tracking portfolios, avoids using popular indices, such as the FTSE 100, as benchmarks.

“We don’t want to get clobbered with license fees for using index brands, such as FTSE, so we look for alternatives to reduce costs for our customers,” said Miller.

Revenues earned worldwide by index providers reached a record $5bn in 2021, up 23 per cent on the previous year, according to the consultancy Burton-Taylor.

But none of the largest index providers — MSCI, S&P Global, FTSE Russell and Bloomberg — provide any detailed public data about the costs of their products and services, which have become essential for the efficient functioning of financial markets globally.

Substantive Research also found significant variations in the costs of market pricing and reference data, for which some institutions pay up to 10 times more than their peers. Reference data include unique identifiers for securities, derivatives, dividends, bond coupons and the multiple counterparties that participate in the millions of transactions that are completed daily across financial markets globally.

“Some data providers are more inconsistent than others in what they charge. The lack of transparency around pricing leaves data procurement teams struggling to manage costs with their budgets consumed by ‘must-have’ benchmarks, ratings and market pricing data,” Carrodus said.

High cost inflation for data services — which are seen as essential for compliance, regulatory and technology purposes across the asset management industry — is another problem cited by users and is in contrast to pricing for investment research, which has fallen sharply in recent years, added Carrodus.

Substantive also found smaller but significant differences in credit ratings data, which are widely used to evaluate debt issuers with some institutions paying three times more than peers. S&P Global, Moody’s and Fitch dominate the credit ratings market.

The UK regulator’s scrutiny of markets data includes credit ratings and benchmarks in a single study that has requested feedback from a range of participants, including asset managers, pension providers and trading platforms.

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