Seven IM, TFC Investments and SCM Private are among those already building passive portfolios, whether that is through tracker funds, ETFs or a mixture of both. It is encouraging that discretionaries – often wrongly perceived as part of a stuffy stockbroking past – are willing to embrace this modern approach, sidestepping away from the mystique that often surrounds active fund and stock picking.
Of course, the best fund managers can add tremendous value – I wouldn’t be working in this industry if I didn’t think that was the case – but is their talent being undermined by climbing TERs?
TERs on the rise
Lipper data shows that, of the 132 equity funds that altered their AMCs between 2000 and 2010, more than 90% increased them.
The average AMC for equity funds grew in almost every year during the period, pushing up TERs by a similar amount. Lipper estimates that TERs – which incorporate the AMC, as well as financial advice costs, and back office trustee, custodian, audit and registrar fees – hit an average of 1.7% last year, more than 10% higher than in 2000.
That is not to say that it is a black and white case that active funds are always more expensive than passive options, but there are reasons to believe that the industry is taking the problem of rising fund costs seriously.
With the RDR’s emphasis on whole of market advice, truly independent intermediaries will come under greater pressure to justify why they have chosen specific investments for their clients, and this includes cost.
Improved disclosure
For its part, the IMA is consulting its members on improving the disclosure of fund charges and transaction costs. Finalised guidance is expected next month, and will be based on existing proposals which seek to build on the rules already in place for Ucits funds under the Key Investor Information Documents (KIID) regime – a key pillar of the pan-European Ucits IV directive.
Regardless of the outcome of these initiatives it’s always good to have options, whether that is discretionaries offering active and passive portfolios to IFAs, or wealth managers offering the same choice direct to their clients.
You can read more about the IMA’s proposals and fund charges in the forthcoming September edition of Portfolio Adviser, out soon.
