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Retail Distribution Review: Effects on Fund Fees in the UK

Passive funds retain their competitive edge

Jackie Beard

 

The Retail Distribution Review came into effect in January 2013 in the UK, and one of its key objectives was to stop fund companies from paying commission to advisers. Instead, advisers were required to have an up-front, transparent agreement with each of their clients about the cost of financial advice and the fees they would charge for this advice. 

In our paper, we look at the impact the RDR has had on open-end fund fees against the backdrop of the rise of passive investing, using a sample of funds that encompass the most commonly sought market exposures, from the viewpoint of a UK investor.

5 observations on fund fees post retail distribution review

  1. While fees dropped at our sample of active equity funds by an average of 18% over the past 4.5 years, on an asset-weighted basis, passive equity funds maintained their competitive edge and dropped fees by an average of nearly 30%.
  2. The downward shift in fees was more muted for fixed-income funds in our sample, with an average 10% drop in fees in actively managed funds compared with a 4% drop in passive funds.
  3. As the transparency of costs has increased and commission payments for advisers have been removed from funds, the proportion of assets invested in passive funds has also increased. From just over a fourth of assets at the start of 2013, passive now accounts for more than 40% of equity fund investments in our sample. The trend is even more pronounced in fixed income, which has gone to nearly 50% passive from 20% active.
  4. The biggest drops in fees on an asset-weighted basis were in passive funds investing in US equities, global emerging-markets equities, and global large-cap equities; passive fund fees fell by 50%, 37% and 36%, respectively.
  5. Fee reductions in clean share classes of active funds were significantly lower than those at passive funds.

 

There is no doubt that the RDR has influenced the marketplace in a good way. There is greater transparency of fees for the investor, and this has brought to the fore the issue of the assessment of value at a fund level. There is much work to be done, though, for all retail investors to benefit fully from the legislation.   

Please see below for important disclosure. 

Download the full paper “The Effects of the Retail Distribution Review on Fund Fees in the UK.”

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