- Most expensive trackers can charge 20 times more than cheapest alternative
- For passive investors cost is especially key as there is no chance for funds to outperform
- AJ Bell analysis shows £10,000 tracking the UK stock market could sacrifice £1,800 in investment returns over a decade by holding the priciest fund
- A £100,000 portfolio could get a £9,000 boost from switching to the lowest cost trackers
Investors could be paying far more than necessary for tracker funds, with new analysis from AJ Bell illustrating how investors could see their gains dented by thousands of pounds over the long-term.
Passive funds track a particular part of the global stock market, often a region like UK, US or European companies, and aim to match an index by holding all the companies in it. Actively managed funds, in contrast, try to outperform the market by picking and choosing which stocks to hold and normally cost more as a result.
Yet the figures from investment platform AJ Bell show the most expensive passive funds can sometimes charge 20 times more than the cheapest option.
Investors languishing in the most expensive funds could see their returns significantly diminished over the long-term. An investor with £10,000 in the most expensive UK stock market tracker, for example, pays £106 in investment management fees every year. They could cut that to as little as £5 in the cheapest tracker fund.
Such a stark difference in charges for funds tracking the same stocks can have a dramatic impact on long-term investment returns. AJ Bell’s calculations show 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 portfolio across seven of the main investment sectors across global equity markets could be almost £9,000 better off over 10 years, based on a £100,000 investment, AJ Bell calculates**.
The most expensive tracker funds are often at least 0.2% more expensive than the cheapest option. In some cases they can cost 0.5% or even 1% more than the lowest price alternative tracking the same region:
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 and be considerably better off.
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. The ongoing Advice Guidance Boundary Review is considering ways to improve the help customers receive, and this is one clear 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, says:
“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 your nest egg 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, and sometimes this means voting with your feet and transferring to a new provider.
“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.”
*Assumed 7% investment return per year over 10 years. Figures compare investment return after charges from £10,000 held in the most expensive UK tracker vs. cheapest UK tracker fund.
**Assumed 7% investment return per year over 10 years. Figures compare investment return after charges from a £100,000 portfolio held in the most expensive vs. cheapest tracker funds. Portfolio split as follows, based on Investment Association FUM to approximate a typical portfolio mix: Asia Pac ex Jap 6%; Europe ex UK 11%; Global 31%; Global EM 6%; Japan 4%; North America 16%; UK 26%. Portfolio is worth £195,117.62 after 10 years in the cheapest funds, or £186,190.92 in the most expensive, a difference of £8,926.70.
