People investing in retail Ucits funds are getting a “very good deal” and “value for money”. That’s according to the author of the “Perspective on the cost of Ucits” report, published by the European Fund and Asset Management Association in September.
The Efama report said that the cost of ownership for an actively managed Ucits fund was 1.68% across all asset classes. Of that amount, 41% went to fund management, 38% went to distribution/advice, and the remaining 21% went to administrative, tax and other expenses.
The cost of ownership for an index-tracking Ucits was 0.57% for equity funds and 0.48% for bond funds, Efama reported. The outlays were slightly different: 38% went to distribution/advice, 35% went to fund management, and the remaining 27% went to administrative, tax and other expenses.
Efama made the calculations using data from Fitz Partners, a research outfit that runs a database of European and UK investment fund fees.
The trade group then simulated the “real-life” performance of an investment made by a retail investor. Efama cited data from the European Securities and Market Authority that showed: “the total value of an investment of €500 in an actively managed equity Ucits and €500 in an index-tracking Ucits made at the end of 2009 was, on average, €2,530 ten years later, taking into account the impact of all costs. The net return (€1,530) can be compared to the total fee retained by the fund manager (€76), the distributor/advisor (€76) and the other service providers (€43).”
‘Cost is small’
The Efama report then stated: “This real-world example of the kind of investment available to European citizens shows that the cost of Ucits and financial advice is small in relative as well as absolute terms. Paying a total of €76 over ten years, or €7.60 per year on average, to receive professional investment services cannot be considered as unreasonable or excessive, especially in light of the net rate of return that the investment brought, i.e., 153% after total costs. The same is true for the total fee paid to the distributor/adviser (€76) over a ten-year period, bearing in mind that this usually involves face-to-face meetings with clients to understand their risk appetite, financial objectives and financial position.
“To put these costs further into perspective, a subscription to a digital music, podcast, and/or video service such as Spotify Premium costs at least €9.99 per month, or €1,199 for ten years.”
In other words, a retail investor would spend roughly 15 times more for their Spotify subscription than for advice buying a mutual fund over a ten-year period (although this is comparing a single placement and not the saver’s entire portfolio). Efama cautioned that specific costs can vary and these calculations are made on benchmark averages.
Some in the EU have advocated for the adoption of the UK model, where individual investors pay for financial advice directly and “inducements” (payments from the fund firm to the advisor or bank who advises retail clients and then sells their product) are banned. Efama said applying this approach to the EU would increase the average cost of advice from €76 to €143.
‘Transparent about costs’
“It’s nothing, of course, against Spotify,” Bernard Delbecque, Efama’s senior director for economics and research, told Delano during an interview. Explaining why the organisation produced the report, Delbecque said that the fund industry wanted to be “transparent about the costs falling on investors that invested in Ucits.” Pointing to the examples included in the report, Delbecque reckoned that individual investors “had a very good deal... there is this argument that [Ucits funds] are too expensive and therefore maybe it’s not a good investment. Okay, what is too expensive?” It is far cheaper than Spotify, for example. He hoped the report would demonstrate how retail investors are receiving “value for money”.
“Although we appreciate a lot the work done by Esma in this area, we think that it’s quite useful to add some data” on top of the figures published by the EU regulator earlier this year. “We were of the view that Esma, at least in its press release, was putting a lot of emphasis on the cost and not enough on the performance.” The implication is that “retail clients continue to lose out due to higher investment product costs”, a position which the trade group believed was “not balanced enough”.
Delbecque stated that he hoped Esma “would appreciate the efforts we are making to further increase transparency. It’s not about blaming someone and naturally we have a good relationship with the research team at Esma.” But he’d like the EU regulator to take a look at Efama’s figures.