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In this context, we distinguish between two main types of costs: (1) the product cost for which fund managers are directly responsible, and (2) the total cost of ownership borne by consumers, which includes the product cost as well as the costs of distribution and advice. In most continental European countries, the distribution and advice costs are bundled in the ongoing charges paid by retail investors to fund managers before being retroceded to distributors.
There, the total cost paid by retail investors reflects the total cost of ownership. The bundling of costs makes it easier to see the total amount to be paid by the client, but it is more difficult to separate and distinguish between the different charges occurring along the fund value chain. This creates a problem with cost attribution, where it is not clear how much fund management, distribution and advice drive cost levels.
At times, this results in some market observers mischaracterising fees retained by fund managers, not being aware that a large part of the cost is driven by distributors and advisers.This Market Insights addresses this problem using cost data calculated by Fitz Partners, a fund research company specialised in the calculation of fees and expenses of cross-border funds at the most granular level of operations possible2. Specifically, we
examine the different cost elements of actively managed UCITS and index-tracking UCITS, as of the end of 2020, and identify the largest ‘cost contributors’. We also look at the absolute amounts paid by retail investors to fund management companies, fund distributors and other services providers.
The cost associated with investment funds has received a lot of attention among policymakers and regulators. For example, ESMA recently stated that “retail clients continue to lose out due to high investment products costs”1. In the previous Market Insights, we addressed this concern by highlighting the huge opportunity cost borne by European households who keep their savings in bank accounts rather than investing in UCITS.
• Investment fund value chain• Cost analysis of actively managed UCITS• Cost analysis of index-tracking UCITS • A real-live comparison between cost and benefits• Concluding remarks