Priciest trackers can be 20x cost of cheapest - research
The charges on the most expensive tracker funds are 20 times the cost of the cheapest alternative despite identical or near identical performance, according to new research by investment platform AJ Bell.
The company says that investors could be paying,”far more than necessary” for tracker funds.
AJ Bell says that an investor with £10,000 in the most expensive UK stock market tracker, for example, pays £106 in investment management fees every year but could cut that to just £5 with the cheapest tracker fund.
AJ Bell’s calculations suggest that holding the cheapest tracker could leave the investor with a portfolio worth £19,580 after a decade, but just £17,807 if they invested in the priciest instead - a difference of nearly £1,800 even though both funds deliver identical performance.
An investor holding a mixed tracker portfolio across seven of the main investment sectors covering global equity markets could be almost £9,000 better off over 10 years, based on a £100,000 investment, AJ Bell calculated.
The most expensive tracker funds are often at least 0.2% more expensive than the cheapest option, according to the firm's research. In some cases they can cost 0.5% or even 1% more than the lowest price alternative tracking the same region.
Tracker Charge Differences
|
Most expensive |
Average |
Cheapest |
Asia Pac ex Jap |
0.32% |
0.18% |
0.11% |
Europe ex UK |
0.13% |
0.12% |
0.06% |
Global |
0.62% |
0.14% |
0.12% |
Global EM |
0.41% |
0.24% |
0.20% |
Japan |
0.31% |
0.15% |
0.08% |
North America |
0.30% |
0.10% |
0.05% |
UK |
1.06% |
0.16% |
0.05% |
Source: AJ Bell/Morningstar
AJ Bell says that while some of the most expensive trackers may have first been purchased by investors some time ago - and could originally have been priced with an ‘all-in’ fee covering investment, administration and any financial advice received at the time - many of these funds have now been moved to a modern investment platform where it is likely investors could switch to cheaper funds.
One issue is that current rules mean that, were investment platforms to notify investors about possible cost savings on passive holdings in their portfolio, they may be deemed to have provided financial advice, AJ Bell says.
The current FCA Advice Guidance Boundary Review is considering ways to improve the help customers receive and the company believes this is one area where a relaxation of the rules around what constitutes a personal recommendation could lead to better consumer outcomes.
AJ Bell, head of investment analysis, Laith Khalaf, said: “It might come as a surprise, but not all tracker funds are created equal.
“There can be a big gulf in charges, and over time this can produce a seriously large dent in nest eggs if you happen to be invested in a higher cost tracker. With no chance of outperformance because they invest passively, the difference in returns between comparable tracker funds will be largely dictated by fees. It therefore makes sense for investors to seek to reduce costs where possible.
“At the moment, platform providers can identify customers who hold higher cost tracker funds, but can’t contact them to point this out as this could constitute personal financial advice. The regulator is currently reviewing the dividing line between advice and guidance, and this is an example of how relaxing the rules could help investors to make better, more informed decisions.”
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