Hats off to Money Marketing investment director Charlotte Richards for a cracking piece of work that highlights that investors could be being left millions of pounds out of pocket from over-paying for what what is no more than a financial commodity
Last year, the FCA estimated the average ongoing cost of a passive fund to be around 0.11% per cent. (11 bps to use the market terminology,
However, a sample of funds analyzed by Money Marketing shows UK-based trackers can be priced significantly above this, with some reaching an ongoing charge fee of 1.5 per cent.
Reviewing a sample of 23 UK funds branded as trackers, based on Financial Express fundinfo data, shows the average charge among the group is 0.41 per cent.
You can read the gruesome details on a data wrap on Charlotte’s article.
If the funds that are priced significantly above that level re-priced down to the current average, investors would be some £104.6m better off.
Household names like Halifax, Scottish Widows and Santander are among those with trackers that appear to come in above 1 per cent in charges.
If all fund groups had to move their tracker’s ongoing charges figure in line with the FCA’s estimate of 0.11%, the picture would be even starker.
Investors would regain another £22m in fees in one year alone, based on the £53.8bn invested across Money Market’s sample.
A market working properly?
Index, tracker or passive funds historically charged a fee that was not too dissimilar to their active counterparts, but the rise of exchange-traded funds has forced passive funds to lower their charges.
As demand for cheap ETFs increases, typical tracker costs have fallen to compete.
Back in September, the FCA released its latest investment management market data looking into profitability and fees.
Based on a survey of 38 of the largest UK asset managers, representing 74 per cent of the UK’s assets under management, the FCA found an AUM-weighted average operating profit of 36 per cent, down slightly from 37 per cent in 2015.
When it comes to fees, the regulator looked at both active and passive funds. According to the research, AUM-weighted average ongoing fees for UK-domiciled passive funds have declined from 0.25 per cent of AUM per year in 2015, to reach 0.14 per cent in 2019, then 0.11 per cent in 2019.
According to Morningstar research, passive fund fees have fallen significantly since 2012. Based on UK large-caps, Morningstar found the average fee has fallen from 0.8 per cent to 0.23 per cent last year, while among UK mid-cap trackers, the average has dropped from 0.28 per cent in 2012 to 0.15 per cent today.
With this in mind, it begs the question: If fees are so low for similar products, how can fund groups justify charging 1 per cent and above?
Pressure has grown on the industry, leading some providers to significantly cut outlier costs for passives. Virgin Money, for example, recently rolled its 1 per cent tracker fee down to 0.6 per cent, bringing it in line with what the firm said were fees for “comparable passively managed schemes in the market”.
The move cost the firm £13m in revenue in 2019, financial results show.
The end of easy money?
The pressure on fees is clearly coming from a number of sources. Advisers can now shop around for their clients , workplace pensions are showing that more can be delivered for less and savvy investors are choosing ETFs over “over-priced” tracker funds.
But this is also a case of the regulator doing its job; holding a mirror to the market and providing good financial journalists (such as Charlotte) with the research which feeds through into better value for investors.
The easy money enjoyed by some providers to this day, is now under further scrutiny, I’ve no doubt that Money Marketing’s research will be being digested not just by those offering funds at the old prices, but by the FCA. I look forward to reading the value assessments for these funds as they appear and I bet the FCA do too.