On the go: The EU’s financial regulator has warned of the impact charges can have on savers’ returns, in a sign of further pressure on investment managers to control fees.
Markets in Financial Instruments Directive Markets in Financial Instruments Directive Published on Thursday, the European Securities and Markets Authority’s first Annual Statistical Report follows the Financial Conduct Authority’s own asset management study last year.
The study, which dealt primarily with retail investors in the EU, found that these savers can pay twice as much as institutional clients in investment charges. The UK’s defined contribution system sees most workplace pension savers tip from institutional schemes into the retail market when they retire.
Fund costs are substantive, can severely impact returns, and vary strongly
Steven Maijoor, ESMA
Total costs were a significant drain on fund performance. The impact varies, depending on the choice of product, asset class and fund type, with costs on average accounting for 25 per cent of gross returns from 2015 to 2017.
The report, which covers undertakings for collective investment in transferable securities, or UCITS, alternative investment funds sold to retail investors and structured retail products, found that ongoing costs such as management fees constitute over 80 per cent of the total cost paid by customers. Entry and exit fees have a less significant impact.
More bad news for active managers
In terms of overall returns, passive equity funds consistently outperform active equity funds. This is further demonstrated by the fact that costs for actively managed equity funds are significantly higher than for passively managed funds and exchange-traded funds.
ESMA also found that market transparency is particularly limited for retail AIFs and SRPs, for which practically no up-to-date data on costs and performance are available.
Commenting on the report, Steven Maijoor, ESMA chair, said: “Our report shows that fund costs are substantive, can severely impact returns, and vary strongly. It demonstrates the importance of cost disclosure to investors, and the need for asset managers and investment firms to take costs into account when acting in the best interest of investors.”
The report provides national competent authorities, including the FCA, with useful information to support the implementation of the Capital Markets Union initiative.
It also demonstrates the relevance of disclosure of costs to investors, as required by the Markets in Financial Instruments Directive II, UCITS and packaged retail and insurance-based investment products rules, and the need for asset managers and investment companies to act in the best interest of investors, as laid down in requirements of MiFID II, the UCITS and Alternative Investment Fund Managers Directives.
