But, while that cut (to a sharp 0.05%) is likely to entice clients, it is the focus on rewarding loyalty that merits further analysis.
Speaking to Portfolio Adviser on the day of the announcement, Ben Yearsley, head of investment research at Charles Stanley Direct, said that part of the reason for the loyalty programme is to: “move the focus away from just cost. The loyalty programme, while partly about cost, is also about providing customers with enhanced services.”
It is not that loyalty programmes are new, nor that Charles Stanley Direct’s is particularly revolutionary. Rather, it is that as costs get ever closer to zero, the industry is going to have to find other ways to differentiate themselves.
This is particularly apparent in the passive space, where prices are getting pretty low.
Fidelity Worldwide Investments is currently leading the race to the bottom, with an announcement at the beginning of June that it has cut the fees on its range of index trackers to as low as 0.07%.
Announcements by Deutsche Bank of the launch of a low cost US equity tracker and a significant cut by BlackRock to its iShares core ETF range around the same time prompted some commentators to wonder if this was indeed the beginning of a price war within the passive sector?
Head of passive investments at Hargreaves Lansdown, Adam Laird, says that because of the levels of competition within the space, further cuts should be expected, but said once fees go under 0.1% the margins start getting pretty tight. But, he added: “If you look at the US market, you can see that fees can get even lower, the cheapest US equity ETF has a charge of 0.04%.”
While not suggesting the UK market is quite yet at that point, he explains that investors continue to be attracted to the market and an increase in scale will likely lead to further cuts over time – especially in some of the more specialist areas, for example in some of the single country trackers where there may still be room to cut prices. But, he cautions: “While the cost of a product plays a large part, you also need to look at the risks being taken to reduce those costs,” he said.
Ben Thompson, business development director at Lyxor ETF UK, agrees that cost is important, but is only one factor in the equation in the passive space.
“Our focus is on efficiency,” he says, “For a passive product that is tracking an index, anything less than the index performance is a cost. The total expense ratio is part of that, the second part is how well it tracks the index. If you buy into something that has a low upfront cost, but that doesn’t properly track the index, you could be giving up in performance what you saved on the fee.”
James Priday, director at Prydis Wealth, says the decline in costs within the passive space is to be welcomed: “Cost reduction is very important as passive funds should simply be a tool for a wealth manager; allowing them to implement their macro calls for clients in a quick and effective way,” he says, “They should be seen but not heard.”
“If there was cost parity across the passive sector, providers would have to really open the bonnet on their processes to attract clients, and greater transparency is good news for everyone,” he adds, pointing out that if price wasn’t a factor, “the provision of research and opinion to clients would become increasingly important as that would become a valuable differentiator," he adds.
Which brings us back to loyalty. As fees get ever smaller, so the marginal impact of cost cuts decreases and more focus needs to be placed elsewhere if a business is to attract new clients and retain the ones it has.
There is no doubt that the costs will continue to be a focus for both investors and providers, but increasingly, providers are going to have to find other ways to stand out from the crowd.
