Investing Online in Funds Just Got Cheaper

Those investing online funds through UK stock brokers have just received a £1 billion boost from the financial regulator. An FCA ruling means that the millions of British investors still invested in older, more expensive funds must be transferred into cheaper versions as soon as practically possible.

Over the past several years, increased competition between online investment platforms and asset managers has led to dramatic drops in annual charges levied by the most popular funds those investing online pay into. The rise of fund comparison sites has also helped force asset managers into more competitive pricing. However, while most investors choosing new fund options through their UK stock broker or investment platform have benefited from this change, as much of a third of all of the money Brits have invested is in older share classes of these funds. That’s according to financial services researchers Fritz Partners, who estimate half a percent a year is, usually unwittingly, being gobbled up in fees as a result. That adds up to over £1 billion a year being added to the bottom line of asset managers who have been happily keeping quiet.

Funds are often made up of different share classes that come with different fees. This allowed asset managers to offer significant fee discounts to institutional investors while retail investors paid higher fees. The justification was that while the product both categories of investor paid into was the same, institutional investors were buying in with tens of millions or even hundreds of millions of pounds. The difference was often 0.75% a year or more. Previous legislation changes demanded by the FCA put a stop to this practise and forced asset managers to offer only one ‘clean’ share class regardless of the value of the investment or who was making it.

However, the legislation only applied to new investors, leaving existing investors in the more expensive legacy share class. While it was possible for them to switch the value of their investment into the updated unified share class, this was generally complicated, especially if the fund was held directly with the asset manager rather than through an online investment platform. As a result, a huge amount of investment capital has remained on legacy rates.

The new ruling means that responsibility for moving investors over to the cheapest version of funds now lies with the asset managers themselves. They also don’t need express permission or instruction from the investors. Many of the investors who hold legacy share classes are of an older demographic and likely unaware just how much extra fees that can look insignificant on paper add up to over the years and impact on compounded returns. The percentage of invested capital in legacy share classes of funds has more than halved over the past five years. However, the drop in fees charged to new investors by asset managers over the same period means the ruling will lead to the headline £1 billion+ saving for investors. Good news ahead of the weekend!