As Mifid statements start to appear on people’s doorsteps, making them recoil at the total costs they are currently bearing, it is clear this could be the start of a second wave towards passive funds. Recent reports on discretionary fund management performance will not have helped this position.
If we look at the use of actives and passives globally, it is interesting to note some comparisons.
According to recent statistics from Morningstar, passive use is close to overtaking active funds in Europe, with inflows of $80bn and $93bn respectively.
In Asia, passives already hold the lead, attracting in excess of $100bn, although actives still take a strong $72bn. In the US, however, actives are seeing outflows of $80bn, with passives attracting $459bn. I spend a lot of my time now in Canada and the amounts going to passives there are still a fraction of what goes to actives: $7bn compared with $23bn.
One key reason for all this deviation is disclosure. With such a continual focus on costs, people are ignoring the fact they are only part of the equation.
When active funds are outperforming passive equivalents, why shouldn’t you pay a bit more? That said, we cannot ignore those DFMs that underperform.
We urgently need a more effective way of disclosing costs. Solutions should be simple and, with lateral thinking, there is no reason they cannot be extended into fund charging. It is through better performance reporting that I believe we will actually get to a solution. This can also address exit charges.
Talking about percentages or basis points is not helpful. It is not treating customers fairly, as the bulk of people have no idea what we are talking about.
Simplicity is everything and transparency is all. What you do for clients is what they will use as a benchmark.
I recently had a client move on and could not help having a quick look at where they had gone. Our charges were 1.25 per cent, which included all costs. When I looked at where they had been encouraged to go by an older relative, not only was the performance not there, but the charges were far higher, running at 3 per cent to 3.5 per cent per annum. An awkward conversation will no doubt follow.
And take when Standard Life recently announced it had cut the Elevate charges. To my mind, it was a bit like a sale in BHS, where prices had been put up a few weeks before, then reduced.
Perhaps that is treating customers fairly in their eyes, but I do not think it is in anybody else’s.
If we can find ways of servicing people at a lower cost, this will put pressure on both the fund managers and the platforms, because providers who ignore this do so at their own peril.
Rob Reid is principal of CanScot Solutions