The effect of RDR on fund fees

Passive managers of equity funds in the UK are cutting fees at a faster rate than active managers – though actives have cut fees sharper in fixed income, research shows.

Morningstar has found that since the introduction of the Retail Distribution Review (RDR) in the UK five years ago – which was meant to reduce fund fees through greater transparency – passive equity funds have cut fees by 28%, compared to 18% for active equity funds.

However, the average fee for actively managed bond funds fell by 10% since 2013 when RDR was introduced, while only 4% reductions were seen in passive bond funds.

Fixed income’s contrast with equities is likely attributed to the slower pace at which passive providers have adopted fixed income products and the lack of competition in the market, Morningstar said.

The researched centred on funds available in the UK (although some were domiciled in Luxembourg or Ireland).

In the UK, the RDR served to unbundle fund management charges from commissions paid to fund distributors – a measure that was meant to lead to a reduction in costs for investors once they realised how much they were paying.

The research showed that fee reductions in ‘RDR-ready’ clean share classes – which were introduced to absorb the fee transparency – were significantly lower for equity than for passive funds and mainly in single figures.

Morningstar also said there had been no significant fall in assets in bundled share classes.

The Financial Conduct Authority (FCA) issued its final guidance on unbundling in April 2018, but concern remains that financial advisers and asset managers alike will be slow to act in switching assets into clean share classes, said Morningstar.

“They may wish to keep those legacy assets in bundled share classes for as long as possible, where their slice of the fees is obscured,” the firm said.

Jose Garcia-Zarate, a manager researcher at Morningstar, said: “There is no doubt that the RDR has influenced the marketplace positively. There is greater transparency of fees for the investor and this has brought to the fore the issue of the assessment of value at a fund level. However, there remains much work to be done for all retail investors to benefit fully from the legislation.”

Passive funds have driven increased competition into the equity market resulting in a price war between active and passive funds, but the market still has further to go, particularly in fixed income, said Garcia-Zarate.

“Additionally, many investors remain in expensive bundled share classes, which are eating into their returns. We hope that now the FCA has issued its guidance on the outstanding issues, those legacy assets can start to move to clean share classes, in the best interests of those investors.”

The biggest drops in fees were in passive funds investing in US equities, global emerging market equities, and global large-cap equities; passive fund fees in these categories fell by 50%, 37%, and 36%, respectively.

©2018 funds europe

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