Costs of investment funds continue to be a divisive topic in the fund and asset management business. Are investors really paying 40% too much? Or ‘only’ 25%? What are they actually paying for? In Luxembourg, home to a third of Europe's 30,000 Ucits funds, this discussion could lead to major changes in the coming years, like it already has in the United Kingdom and the Netherlands.
The release of the European Commission's strategy for retail investors featured prominently in this week's coverage at Investment Officer. Colleague Mike Gordon listened to the Brussels press conference, where Commissioner Mairead McGuinness again took a firm stance and pushed back on industry allegations that the Commission had exaggerated the impact of inducements.
“I think it’s very clear that the status quo is not acceptable,” the commissioner stated. “I think the fact that retail investors pay 40% more than other institutional investors speaks to an opportunity, in my view, to narrow that gap.”
Good cop bad cop
The industry earlier this year blew the whistle on McGuinness, saying the Commission had misinterpreted a Kantor study, which had led McGuinness to exaggerate the cost gap in her comments to the European parliament on kickbacks. On 8 February, the Commission updated an article about the publication of the Kantor study to correct this figure, pointing out that "costs for products that carry inducements are 24-26% higher than those products which do not carry inducements, and not 35% as previously reported."
At Wednesday's Brussels press conference, McGuinness was accompanied by EC Vice-President Valdis Dombrovskis, who is regarded as a bit more industry-friendly. It looked like a ‘good cop bad cop’ approach. Both McGuinness and Dombrovskis belong to the EPP, the political group of christian-democratic parties in Europe that is receptive to industry arguments. Dombrovskis spoke about “the need to strike a balance”. The EU’s retail investor strategy now will use the ‘value for money’ concept as a basis for the new policy.
‘Not fair’
The European Securities and Markets Authority (Esma) also raised concerns about undue costs in funds. Esma has been asked by the Commission to develop new cost benchmarks for investment funds, something which the industry questions. “It seems unlikely that this can be done fairly," said Michael Pedroni, Brussels chief of the Investment Company Institute, which represents 38,000 billion dollars in regulated investment funds.
Luxembourg's financial supervisor Commission de Surveillance du Secteur Financier meanwhile is processing reports on costs structures that the industry was ordered to file in April. CSSF has said it is discussing this with “certain IFMs” in the grand duchy.
Research on actively managed, open-ended bond funds by Morningstar last year showed that Luxembourg funds are more expensive than those in Ireland, France and Germany. Mara Dobrescu, CFA, Morningstar's global asset class lead for fixed-income strategies, at the time made clear a high cost “nibbles” a greater proportion of the expected return.
Hidden fees
Luxembourg-based private banking clients, meanwhile, are not completely dissatisfied, according to a EY study. Only a third of them are concerned about hidden fees, compared to 54 percent of investors worldwide. EY said various EU regulations on costs, disclosures and transparency, have already given Luxembourg clients a better understanding of the fees that they are charged. The study looked at wealthier clients, not retail investors.
Among wealth management clients, 70 percent feel they get value for money. But the study also showed that even wealthier clients prefer different payment models than the standard assets under management-based pricing. Instead of a percentage of assets under management, funds can also adopt other metrics for their fees, such as performance, of use fixed fees.
The study also shows that the debate fund costs is not exclusively restricted to Luxembourg, or to Europe. Investors everywhere are keen to get value for money. They are willing to pay for good products and for good advice, but also want to know what they're paying for.
For an industry that feels it's already burdened by regulatory pressure from sustainability and anti-money laundering rules, and the need to invest in future-proofing services by upgrading IT systems, a mandatory overhaul of what has been a profitable cost structure for many decades may feel unfair.
It may also bring an opportunity for the industry to put its money where its mouth is, placing clients first by innovating and offering them true value for money.
