Retail investors pay up to 60 times more than institutions

Posted by TEBI on March 15, 2022

Retail investors pay up to 60 times more than institutions




One of the more regrettable aspects of the UK asset management industry is the unequal treatment of retail and institutional investors. Retail investors — the man or woman in the street, if you like — tend to be far less financially savvy than institutional ones. And yet they’re also paying far more than institutions to invest in exactly the same fund. We’re not talking about a small difference either. As SUNIL CHADDA explains, they’re actually paying up to SIXTY times more.


The recent LCP Investment Management Fees Survey from Lane Clark & Peacock published last month provided some strong insights (thank you, LCP) into the world of unit-holder inequality between well-advised institutional investors and those at the other end of the asymmetry spectrum – the retail investor.

According to the LCP report, which used publicly available data from retail investment platforms to compare retail share class costs with those paid by institutional investors, the retail investor pays 0.2% p.a. more than what an institutional investor pays for a global equity mandate and 0.4% p.a. more for a multi-asset mandate. Of the 49 funds sampled, 92% involved retail investors paying more, with some equity funds charging retail 1.0% more each year. Most of us know this to be the case. If you buy anything by the tonne rather than a shopping trolley, discounts generally apply.

Funds on investment platforms are in the spotlight and are subject to more transparency and competition than many legacy funds that were launched 15 years or more ago. Newer funds might, therefore, represent the thinner end of the retail cost wedge, despite investment platforms not necessarily using their immense buying power to drive share class costs down.

Some legacy funds that I have looked at tell a very different story. These funds are not in the public eye per se and may be held in wrappers, such as ISAs and in pensions, by captive clients of high street banks and life insurance companies. The profile of the retail investor buying these funds is one of disengagement with their finances due to issues such as poor financial understanding and the complexity of everything finance-related. Many have bought a product that they have put away for years, often decades, until retirement. It is their pension.

Based on the Annual Management Charge (AMC) charged to retail and to the cheapest institutional share class, the retail investor pays between two and eight times more. And when the Preliminary Charge (i.e. the fund “entry fee”) is factored in. then this differential rises exponentially to between ten and 60 times. It is all rather strange given that the funds concerned have a MiFID II determined target market that is the retail investor.

Smaller pots of money held by the retail investor may cost more to service than the larger institutional investor, but does it really cost between two and eight times, or between ten and 60 times, more? The FCA’s Assessment of Value regime was designed to force fund boards to level the playing field by ensuring that all share classes provide “value” to those who hold them. Clearly, more needs to be done on behalf of a lot of retail investors and with a high degree of urgency.

Asking a bigger question: Is unit-holder inequality limited to the differential in share class costs? I think not. Some funds have internal share classes that pay little or do not contribute any AMC at all to the costs of running a fund. Retail investors may find themselves paying the highest share class cost of any investor type in the fund but are also inevitably subsidising other investors in the process.

Most of us have our own pensions and savings, but many of us also have children and other dependants to provide for.  Are the interests of the fund management firms and their institutional investors being put before the interests of the retail investor?

It’s a question that I will seek to cast more light on with subsequent posts on this subject.


This is the first in a series of articles that SUNIL CHADDA will be writing for TEBI. Sunil is a a member of the secretariat for the All Party Parliamentary Group (APPG) for Personal Banking and Fairer Financial Services, an ex-Advisory Board member and ex-Special Adviser to the Association of Professional Fund Investors (APFI), an Ambassador of The Transparency Task Force (TTF) and a member of the UK Shareholders’ Association. You can follow him on LinkedIn.



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