There has been much discussion in recent weeks over the impact of the retail distribution review on fund fees and Fidelity and Vanguard have both called for greater transparency.
However, the one-sided nature of the debate should give people pause for thought. Rowan Dartington head of collectives research and FE Adviser Fund Index panellist Tim Cockerill says: “I have always felt there has been an unhealthy focus on fees. The key is to do your best to find the best possible investment.”
In the past it has been difficult for consumers to unravel how the fee structure is broken down between adviser, product provider and platform. The RDR aims to address this with the ban on trail commission, meaning there could be a greater degree of competition over fund fees.
Legal & General Investments managing director Simon Ellis says: “Historically, annual management fees have not been important for clients. As a consequence of the RDR, the industry’s business model has effectively doubled in price and we are going to have to get new structures.”
Cockerill and Ellis say it is unlikely there will ever be a harmonising of fund charges across the industry and question whether that would even be desirable. In a competitive market it is reasonable to expect that some products will be able to charge more for their services.
If fees become the overwhelming concern of legislation, some products may be denied to retail investors. Cockerill says: “Over the years, I have had many tracker vs active fund debates. It usually focuses on primary cost and not performance goals, which could prove a race to the bottom both for cost and quality.”
The funds that will suffer most from the greater scrutiny of the RDR will be the perennial underperformers. Whether some of these will start trying to compensate for poor performance by lowering fees remains to be seen but should be a cause for concern.
At the other end of the spectrum, the growing complexity of products with proven track records and specialities will become ever more desirable. Rather than just creaming off annual management fees from these star managers, however, perhaps a model that amply rewards them based on performance would be fairer.
Cockerill says: “It would be interesting to see funds with low base fees but a performance fee laid over it.” This may not prove the only model for retail funds but for those higher octane products it might be sensible to bring manager remuneration in line with actual returns to investors.
However, Ellis says he can see a divide in the market after the RDR, where assets held in weaker, actively managed funds will drift towards passive funds. He says: “If people start chasing fees, the dog funds will become zombies.”
Whether or not Ellis is right it seems that the fees debate is leaving behind the very people it was aimed at. Advisers and their clients can decide for themselves what does and does not constitute a fair price for the service they receive. Because of this, plurality rather than uniformity may well be the way forward, providing it is also matched with greater transparency.
Data supplied by FE