Pensions, insurance funds urged to choose low-cost passives
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Pensions and insurance funds should reject complex and expensive actively managed investment options and instead choose low-cost passive alternatives as often performance fees are being levied for industry average returns, according to a leading thinktank.
In a new report on the financial services sector, the Institute for Public Policy Research says in many cases the fees being paid do not justify returns that seldom beat the market and that low-cost investments such as tracker funds would be a better option for many.
IPPR also calls on asset managers to be forced to provide more information to their customers about investment strategies, turnover and fees in an effort to be more transparent over what is being charged and what investors are getting in return.
The report states that competition alone has not acted to bring costs down, revealing that despite the market swelling to thousands of funds fees and costs have remained at the same level. It says transparency would be an “important weapon” in this area, especially to the extent that it exposed remuneration of fund managers.
However, the report warns that in some circumstances transparency might lead to a boost in salaries as senior executives will see what their contemporaries are earning.
At a minimum, regulations should be put in place to force disclosure of remuneration packages, including the criteria used to determine bonuses for all employees earning above a certain threshold, the report states.
The report also wades on the banking ring-fence debate, suggesting that retail and investment banking activities should be split into separate organisations. It said that the “clear message” from history is that the financial system is safer when retail and investment banking are separate.