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EU regulator warns fund costs are eroding investor returns

The European Securities and Markets Authority has found that fund costs reduce retail investors’ returns by an average of a quarter.
In a major report, Esma finds that costs have a significant impact on the final outcome of investment decisions, particularly for retail clients, who pay twice as much as institutional ones.
For Ucits funds, management fees and other on-going costs make up 80 per cent of investor charges, with entry and exit costs making up a far smaller proportion of fees paid.
Esma warns that while a 25 per cent gross hit on returns is the average, the effect of costs can vary widely, with different products, asset classes and fund types impacting investors differently, as well as variation across different EU member states.
Passive equity funds were found to have better overall performance that active ones, in part down to the associated cost differences.
The agency warns that there is “practically no up-to-date data on costs and performance” for retail alternative investment funds and structured retail products, where “market transparency is particularly limited”.
Esma chair Steven Maijoor says: “The report is an important building block in our investor protection work. Retail investors in the EU benefit from the choice among thousands of Ucits and alternative funds and structured investment products. It is key that they are aware of the costs and performance of these products.”

“Our report shows…the need for asset managers and investment firms to take costs into account when acting in the best interest of investors. This evidence should prompt investors to carefully compare the costs of investment products when making investment decisions.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. ESMA has a point about fund costs eroding investor returns.

    Fund costs, however, have various components and regulatory costs are one.

    My bet is that regulatory costs have risen exponentially since this slew of ongoing complex regulation started post 2008.

    ESMA needs to look at the Cost Benefit Analysis (CBA) of each regulatory set and understand if the reality matches the CBA.

    There has been no roll-back of damaging regulation, instead the EU just introduces more.

    ESMA also needs to urgently analyse the regulatory landscape across the EU as it is not a level playing field at all. Investors need to know which EU jurisdictions are behind on implementation and monitoring and should decide accordingly where and how to invest.

    Why is this information not publicly available?

    • Agreed.

      The ‘sunset clause’ of unbundling charges in retail funds introduced regulation, workload and cost and the outcome is that the total cost to invest hasn’t really changed much. Some funds (albeit the minority) are now more expensive and the increased clarity has also increased client confusion.

      RDR had more of a benefit but still introduced many issues and advice costs for clients.

      Regulation which has tangible benefits is welcomed.

      Regulation which creates paperwork, restrictions, advice points and additional costs with minimal benefit for the consumer generally isn’t.

      • Agreed too Paul.

        Investors can purchase financial products from 3 segments within the asset management industry;

        Insurers (under the ABI)
        Asset management firms (under the IA)

        and investment companies (under the AIC)

        These 3 segments have been treated differently over the years by regulators, with the insurance segment lagging behind badly.

        Why isn’t everything running at the same speed – and are consumers (investors) even aware?

        From a personal perspective, I believe that the insurance segment has much to do to ensure better outcomes for consumers.

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