ESMA: Fees erode 25% of retail investors' fund returns

ESMA's first Annual Statistical Report on the cost and performance of retail investment products across Europe is the latest regulatory intervention signalling greater pressure on asset managers to provide value for money for investors.

The regulator said costs represent "a significant drain on fund performance", which impacts retail investors "to a much higher extent" than their institutional counterparts, which on average pay half as much in fees.

In addition, active equity products were found to "consistently" underperform their passive counterparts in terms of overall returns, despite fees being "significantly higher".

The impact of fund costs on returns was most striking with regard to active equity funds, which see returns drained by two percentage points on average.

ESMA said: "This is further demonstrated by the fact that costs for actively managed equity funds are found to be significantly higher than for passively managed funds and ETFs.

ESMA's report also found the impact of fund costs, which on average account for 25% of gross returns in the period from 2015 to 2017, varies across fund type, asset classes, and the EU member state the investor is based in.

It  also revealed ongoing costs such as management fees constitute over 80% of the total cost paid by customers, whilst entry and exit fees have a less significant impact.

ESMA's findings are being provided to national competent authorities, such as the UK's Financial Conduct Authority (FCA), with the aim of providing consistent EU-wide information on cost and performance of investment products, in efforts to facilitate increased participation by retail investors in capital markets.

Significantly, the report also found a lack of available and usable cost and performance data, especially for retail AIFs and Structured Retail Products (SRPs), which ESMA signalled is "a significant issue from an investor protection perspective".

It found that market transparency is "particularly limited" for retail AIFs and SRPs "for which practically no up-to-date data on costs and performance are available".

ESMA said the report demonstrates the relevance of disclosure of costs to investors, as required by the MiFID II, UCITS and PRIIPs rules "and the need for asset managers and investment firms to act in the best interest of investors".

It echoes ongoing work from the FCA on value for money, following the regulator's Asset Management Market Study, which will see new requirements come into force for UK-regulated asset managers later this year.

'Can severely impact returns'

Commenting on the report, ESMA chair Steven Maijoor (pictured) said the findings were an "important building block" in the regulator's investor protection work.

He added: "Retail investors in the EU benefit from the choice among thousands of UCITS and alternative funds and structured investment products.

It is key that they are aware of the costs and performance of these products.

"Our report shows that fund costs are substantive, can severely impact returns, and vary strongly.

"It demonstrates the importance of cost disclosure to investors."

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• Topics
• Regulation
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• management fees
• FCA
• Mifid II
• Financial Conduct Authority
• UCITS
• AIFMD