The EU should not assume the UK and Dutch bans on retrocessions constitute a superior business model for fund distribution, according to Efama. Bernard Delbecque explains why.
This year will be marked by intense discussions on whether the rules governing the distribution of investment funds should be reformed to follow the approach taken in the UK and the Netherlands and ban retrocessions. Some stakeholders consider that the business model, in which distribution and advice costs are bundled in the ongoing charges paid to fund managers before being retroceded to distributors, is not the most appropriate for retail clients. The debate is complicated by the fact that very little data is available on the fees retained by fund managers, distributors and advisers. This leads some observers to conclude that investors get a better deal under the unbundled fee-based model because of the lower ongoing charges. The truth is that these charges are lower because they exclude the fees paid by investors to receive financial guidance or advice.
To contribute to the debate on this important issue, Efama has recently published a study using data calculated by Fitz Partners on the fees and expenses of cross-border Ucits domiciled in Luxembourg and Ireland. This shows that the simple average cost of ownership of actively managed cross-border Ucits offered to retail investors is 1.68%, with fund managers retaining 0.69%, third-party providers, for example, data and research providers, 0.35%, and distributors 0.64% in compensation for the provision of advice and for acting as the intermediary for retail investors. This means the share of the costs of distribution and advice in the total cost of ownership of Ucits averages 38%.
Although index-tracking Ucits have, on average, lower costs than actively managed funds, distributors of these funds are paid the same percentage of the ongoing charges as that received from offering actively managed Ucits (38%). These findings confirm that distribution and advice costs represent a sizeable part of the total cost borne by investors.
The report also provides a yardstick to compare the cost to investors under the bundled and unbundled fee-based models, in light of the evaluation of the impact of the Retail Distribution Review and the Financial Advice Market Review published by the Financial Conduct Authority (FCA) in the UK in December 2020. The FCA found that the cost of funds, excluding distribution and advice costs, averaged 1.1% and ranged from 0.4% to 2.0%. This cost is comparable to the average product cost of actively managed cross-border Ucits (1.04%) and index-tracking Ucits (0.32%). The FCA also revealed that advisers charge 0.8% per annum for ongoing advice. The total cost of fund ownership in the UK averages 1.9%, which is higher than that of actively managed cross-border Ucits (1.68%).
Two other FCA findings are important: first, only 17% of UK adults with over £10,000 in investible assets sought regulated financial advice in 2020, and secondly, consumers who do not receive advice hold a significantly higher proportion of their wealth in cash than those who get support. We therefore caution against any hasty decision to dismantle the existing EU distribution model, without making a careful and holistic assessment of what impacts a ban on retrocession could have.
Bernard Delbecque is senior director, economics and research, at the European Fund and Asset Management Association
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