Distribution accounts for almost half of the total cost of fund investing, according to new research from the European Securities and Markets Authority (ESMA).
In a report that details the regulator’s first comprehensive analysis of investment fund costs, ESMA reviewed funds with €7.2 trillion in assets under management (AUM). The funds represents 66% of the total fund market, 80% of which can be sold to retail investors, along with €2.6 trillion worth of alt funds.
Among other things, the analysis found that retail fund costs ranged from 0.5% for bond index funds to 2% for active equity funds — while, for alt funds, costs came in between 1.4% and 2.8%.
On average, across distribution channels, distribution costs represent 48% of mainstream fund investors’ total costs, and 27% of alt funds’ costs, the report said — adding that these costs vary by distributor, asset and fund type.
“These high costs are primarily driven by the traditional and dominant role of credit institutions and investment firms in the distribution chain,” it said. It noted that online platforms and discount brokers are cheaper.
Overall, ESMA found that independent financial advisors are the most expensive distribution channel, followed by financial institutions, with discount brokers as the cheapest option, since they only provide order execution — whereas advisors and financial institutions also provide advice and portfolio management services.
Additionally, the research found that, “In commission-based models … inducements represent around 45% of product ongoing costs, on average, across distribution channels.”