Presenting investors with a warning about the impact of fees and charges on the returns they can earn means more switch to cheaper funds, according to a study conducted by the Financial Conduct Authority (FCA).
The regulator said that before it makes any further policy interventions into the area of fund pricing, it wanted to conduct a study to see how responsive investors are to warnings about fees and charges.
The information was contained in an Occasional Paper produced by the FCA and released on 5 March.
It was published alongside policy changes which mean fund management companies must prove they give investors a worthwhile service for their fees, part of a raft of measures being introduced by the regulator to ensure asset managers act in the best interests of their clients.
For its behavioural research on the impact of fee warnings, the FCA recruited over 1,000 non-advised investors to participate in its testing.
The regulator created a mock fund platform, and asked the group to choose funds.
Each person in selected for the research had purchased actively managed funds in the past, and each has at least £10,000 of investible assets of their own.
The regulator divided the participants into four groups. It presented each group with a different warning about the costs of the products they had chosen.
The first warnings were a message at the top of a page containing six funds. The warning urged investors to check the charges they would pay.
The second group received a warning with a chart showing the difference a small difference in the level of charges between two funds can make to returns over a long period of time.
This warning was also shown at the top of a page showing six funds.
The third group saw a warning with a comparator chart. This included a chart comparing a fund’s charges to others in the same asset class. This was on fund-specific pages which investors could open as pop-ups.
The final group were shown a warning with a review screen. This includes a screen that appears once investors have selected a fund. This provides a summary of the costs and charges for their chosen fund as well as the comparator chart. Participants must either confirm their choice or go back to look at the available funds again.”
The study found that in all four scenarios, the proportion of investors choosing the cheaper fund increased when the warning was included.
But it found that investors did not place any less weight on the performance and volatility level of the fund.
The FCA said: “We believe that the findings from this research on the importance of disclosing costs and charges in a clear and meaningful way are consistent with a significant body of previous work.
"The FCA has stated that firms should consider these results when thinking about how their disclosures are working.
"The FCA will consider changing rules and guidance to mandate certain forms of disclosure in light of the outcome of the Investment Platforms Market Study.”
Paul Gibson, a financial adviser at Granite Financial Planning in Aberdeen, said: “As a firm we have avoided using actively managed funds for several years due to their high charges and general underperformance.
"While Mifid II will I feel lead to lower charges going forward I have seen no evidence so far.”
David.Thorpe@ft.com
