Following the financial crisis and regulatory changes over the provision of advice, investors are starting to wonder exactly what they get for their money.

The past few years have shown that paying extra for active fund management does not always guarantee a good return.

Managers have ‘off’ periods and sometimes do no better than tracking the market, let alone beating it. And advisers are coming under pressure to be clear about how their advice is actually being costed.

The arrival of clean share classes has also made the costing of financial investment much more transparent, and as competition stiffens in the investment landscape, so pressure is being put on prices.

Passives, in the form of ETFs and index trackers, have been around for decades, and in the UK, trackers have been far more established than exchange-traded funds.

But ETFs are catching up. According to research organisation ETFGI, the assets invested in ETFs and ETPs in Europe amounted to $477.4bn.

Tracker funds in the UK saw net retail sales of £368m in August this year, with total funds under management standing at £85.2bn.

The reason for this is cost. Investors can buy passive products for charges as low as 0.7 per cent a year. This compares with active funds charging a TER of more in the region of 1 per cent to 1.5 per cent. When returns are not exactly stellar, investors are starting to question whether it is worth paying the extra basis points.

The other advantage with passives is that, especially ETFs, they allow investors access to other markets with which they might not be familiar.

They can buy into commodities or foreign exchanges, in a way that is more secure and appealing.But passive investing is not the panacea.

Proponents of active management say that passive funds go up with the market and down with the market, and there is very little deviation.

Active management at least allows the chance for a manager to beat the market and attempt to do better based on his or her knowledge and insight.

The general consensus is that a balanced portfolio should have both passive and active funds, and the costs of each should be clearly spelled out to the investor. This has been the promise of the RDR and is the general direction of travel.

Melanie Tringham is features editor of Financial Adviser. Nyree Stewart is features editor of Investment Adviser

This special report is sponsored by HSBC Global Investors. All editorial is independent.

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