Accessing market returns - why aren't advisers offered cheaper investment solutions for clients?

    Fees in the investment industry have long been a concern for many advisers and their clients.

    Higher fees eat into overall returns, especially over the long term, and have rightly come under increased scrutiny over the past decade following both the RDR and the FCA’s asset management market study.

    Managing costs is particularly important now as return expectations across asset classes have fallen to all-time lows.

    Government stimulus has resulted in record low rates meaning investors and clients can expect, on average, returns that are three per cent lower than 10 years ago.

    In a low return environment, asking clients to pay high fees becomes an increasingly difficult conversation, with costs eating into a larger proportion of potential returns.

    The solution we expect to emerge over the coming years is one in which advisers continue to shift to the lowest cost options available for accessing returns, while using active investments increasingly selectively.

    One thing is for sure though - investment costs have further to fall.

    The trends in fund costs

    For the last few decades, the asset management industry has continued to reward scale, giving better deals to institutional clients over retail ones.

    Things have improved more recently, with retail fees falling some 31 per cent since 2013, according to Morningstar research.

    We’ve seen a similar trend for fund costs on our platform with fund management costs related to assets under management (AUM) decreasing by 16 per cent since 2015.

    About a third of this fall was driven by cost reductions of existing funds, and two-thirds by the increased introduction and allocations to different, cheaper funds.

    Over the period between 2015 and 2020, we saw the allocation to passive funds increase from 35 per cent to 41 per cent of fund assets on the platform, showing the trend towards lower cost investing.

    Breaking the numbers down reveals some intriguing trends. Within passive allocations, we saw an average price reduction of 15 per cent, whereas within actives it was nine per cent.


    Despite the drop in retail pricing we think there’s further to go, especially when you consider the pricing offered to institutional investors.

    The weighted average fund management charge on our platform today is 0.6 per cent, excluding transaction costs.

    This is still substantially higher than the institutional world, where we estimate average fund management charges to be just 0.2 per cent.

    What this means, in effect, is that clients’ personal investments are on average three times more expensive than their workplace pensions.

    This matters now more than ever with return expectations so diminished given the current low yield environment.

    Where is the outperformance?

    The traditional counterargument to passives is that actives are worth paying for because they deliver higher returns.

    We agree that higher fees are not detrimental if fund managers outperform net of fees, as clients are therefore achieving value for money.

    However, the balance of evidence continues to be stacked against active management, with research consistently showing that higher cost funds typically underperform.

    A recent report from Morningstar indicated that across two-thirds of asset classes, just 25 per cent of active managers outperformed their passive equivalents over 10 years, once fees were accounted for.

    In fact, in only three of the 63 asset class categories analysed did over 50 per cent of active funds outperform their passive peers.

    Given all this, we believe a low-cost investment approach will become the default option for retail clients. Prices are simply too high, and returns likely to be too low, to have it play out any other way.

    However, we don’t think this will or should be about a race to the cheapest products.

    There are pockets where active management approaches can add value over the long term.

    When including these allocations, it’s even more important to manage pricing in order to keep overall portfolio costs low.

    This helps advisers achieve pricing as near to institutional products as possible, something which will be an increasingly vital component to achieving better value.

    In general, we believe an institutional investment approach makes sense for advisers as the focus on long-term goals chimes with how advisers plan for their clients.

    Advisers are mapping out clients' lives and goals for perhaps 20 to 30 years or longer, and investments need to better reflect this.

    The problem is the solutions available often don’t meet those requirements, focused as they are on short-term performance.

    We expect this to change rapidly over the coming years, with investments that combine the best risk/return rewards across asset classes and that are focused on outcomes.

    Active funds will have to be far more cost-effective to shine in that world.

    Jonathan Letham

    Head of IMX