Fund fees down 31% but 'cost sensitive' advisers eye further cuts

Fund fees down 31% but 'cost sensitive' advisers eye further cuts
 Credit: Jason Alden/Bloomberg

The cost of investing is likely to drop further as advisers push for cheaper alternatives while the regulator has its beady eye on ‘value’ and consumers face a low-return environment.

Advisers and analysts have predicted the downward pressure on fund fees — which new research shows has caused a decline in costs of nearly a third since 2013 — will continue, despite investors paying less in charges than ever before.

Scott Gallacher, chartered financial planner at Rowley Turton, said: “I think the trend will continue and fund managers will eventually have to compete on costs, especially if we experience lower inflation and lower returns moving forward. 

“This is because, in a lower return environment, cost will become a bigger drag on performance.”

Mr Gallacher added that advisers were “much more cost sensitive” than before and would now tend to select cheaper funds.

Mike Barrett, consultant at the Lang Cat, agreed. The Lang Cat’s own research showed most advice firms are proactively reducing the total cost of investing by recommending lower cost investments and that the price tag attached to the investment solution tends to be the part of the value chain most in focus.

He added: “This is a trend we’ve been tracking over a number of years, and with the Financial Conduct Authority seemingly taking a closer interest on value for money, it is a trend I expect will continue.”

The comments come as figures from Morningstar showed the average fee paid by investors across all funds analysed was 0.69 per cent in October 2020 — a drop of nearly a third (31 per cent) over the past seven years.

Investors clearly opted for cheaper funds, however, as the average fee charged by the industry was 1.17 per cent, a decline of 19 per cent in the same time period.

According to Morningstar, flows into funds charging fees that rank within the bottom quartile of their category had consistently outpaced flows into more expensive funds. 

There was also evidence of a shift from active to passive funds among investors in the cheapest portfolios.

Martin Bamford, head of client education at Informed Choice, said: “Downward pressure on fund management fees is largely the consequence of index trackers rising in popularity. 

“Fund management groups were insanely profitable before passive funds became a dominant investing trend and had plenty of fat to cut to become more competitive.”

He said the downward pressure on fees was likely to continue because, as well as investors and advisers opting for cheaper products, efficiencies gained through technology had also helped managers run their funds at a lower cost.

Morningstar’s data showed the average fees charged for funds run with an environmental, social and governance mandate were lower than their non-ESG peers.

In October 2020, the average fee for ESG funds was 0.57 per cent compared to 0.71 per cent for non-ESG portfolios.

Jose Garcia-Zarate, associate director of manager research for passive strategies, said: “The decline in fees is a big positive for investors because fees compound over time and diminish returns.