Transfer Pricing Asset Management Survey

Distribution

Based on our findings, there is a prevailing trend towards the utilization of fee split as the TP model to remunerate the distribution function within traditional funds.

The testing of the fee splits generally involves a combination of internal and external comparable uncontrolled price (‘CUP’) methods. Moreover, the survey results indicate that both internal and external CUP-based fee splits are equally favored within this context.

More than half of the respondents have reported utilizing fee split or profit split as the chosen TP model to remunerate the different entities within the distribution function. Typically, these approaches are utilized to split the global distribution fee among the business units performing the distribution (or sales and marketing) function, as opposed to splitting the total management fee into its components (e.g., distribution, portfolio management, administrative functions, etc.).

Alternative investments

In alternative investments, the fundraising and investor relationship function is extremely rarely remunerated on a stand- alone basis. Among the respondents, we observed its incorporation into residual profits flowing to entities of the group performing portfolio management, including the investment committees, senior executives and founders of the groups.

Sales and marketing

According to our findings, sales and marketing functions are commonly managed in the EU by branches of the management company in the local jurisdictions. As many as 70% of the surveyed respondents with branches reported that their branches were engaged in distribution or sales and marketing functions.

Typically, standard sales and marketing activities still receive remuneration based on a cost-plus basis, reflecting the rather routine nature of these functions. The mark-up over cost for sales and marketing functions typically ranges between 5% and 15%, with the median mark-up at 10%.

Portfolio management

According to the survey, more than half of the respondents opt for the profit split method, while nearly a quarter utilizes the fee split approach. Additionally, there is a notable presence of the external CUP method, whereas the internal CUP and cost-plus methods show comparatively smaller usage. These patterns seem to underline the perception of many asset managers that the portfolio function holds the central value within their value chain, attracting the primary share of generated profit/loss.

More than half of the respondents have reported using the profit split method as the chosen TP model for the portfolio management function.

Common profit split mechanisms encountered during the survey included:

• Location of Investment Committee Members
• Portfolio management teams’ general headcount per jurisdiction
• Costs of portfolio management team’s business units.

The residual profit split is frequently employed as the TP model for portfolio management, involving remuneration for entities using a cost-plus model, with the remaining profit directed towards the portfolio manager or mix of portfolio management teams.

Investment advisory

The survey indicates a prevailing pattern in the use of the cost-plus model as the primary TP model for compensating investment advisory services. Nearly 70% of respondents favor this remuneration model. Notably, almost 30% of respondents opt for a combination of profit split and fee split methods, documented via the use of CUP analyses.

Nearly 70% of the respondents have reported utilizing the cost-plus method as the chosen TP model for their investment advisory function.

Back-office

The survey findings on TP models for compensating the back-office function showcase a significant majority favoring the cost-plus method. The mark-up over cost for administrative functions typically ranges from 5% to 10%, with the median mark-up at 7.75%. The high prevalence of the cost-plus model as a remuneration method can probably be attributed to the fact that administration is not perceived as a key value driver within the asset management value chain. Instead, similarly to the management company, it is seen to have more of a facilitating role.

Nearly two-thirds of the respondents have reported using the cost-plus method as the chosen TP model for their administrative function.

Management company

Based on our findings, a prevalent trend emerges in the use of the cost- plus method as the primary TP model to remunerate the management company function, with nearly half of the respondents favoring this model. Additionally, it's worth noting that for the remaining models, the majority of respondents resort to using external CUP benchmarks. Neither in the management company nor in the administration functions have we observed instances where internal CUPs are used for establishing the remuneration model of these functions.

Nearly half of the respondents have reported using the cost-plus method as the chosen TP model for the management company function.