Vanguard calls for clarity on fund fees
The fund management industry must accept the need for change, says Tom Rampulla, managing director of Vanguard UK. In particular, he called for transparency and clarity on fees, as only if investors have that information can they make an informed decision on investments.
Rampulla says: “We have witnessed downward pressure on fund fees in the run-up to implementation of the UK’s Retail Distribution Review (RDR), but there is still a long way to go if investors are to fully benefit from the fantastic opportunities presented by the RDR and phasing in of auto-enrolment.”
“A handful of firms have followed Vanguard’s lead in introducing low cost funds, however many more firms would be compelled to do so if fees were made transparent and easy to understand. Investors can’t control the financial markets or a fund’s performance, but they can control what they pay to invest. Only by making fees easy to understand can investors make an informed decision. The fund industry has a responsibility to help investors reach their goals, and must fulfill that obligation by embracing transparency and providing investor education.
Performance-related fees are just one example of the barriers to an investor understanding what they are paying for, says Rampulla. Vanguard believes that for actively managed funds, “the investment adviser’s compensation should increase and decrease depending upon how the fund performs relative to an appropriate benchmark over time. This aligns the adviser’s interests with the investors’ interests.”
Under typical performance fee arrangements, the adviser is paid a base fee, with additional fees earned for high relative performance, but no penalty is assessed for underperformance.
Rampulla says: “It’s difficult to see any benefit to investors under this approach. Moreover, since outperformance usually requires additional risk taking, it seems anomalous that the fund manager gets a disproportionately high share of the reward, when the extra risk is borne by the investor.
“Passive funds, such as Vanguard’s, with an average TER of 28 bps, have a significant cost advantage. They also provide transparency – their TERs actually are their ‘total’ cost. We hope that the forthcoming RDR will go a long way to ensuring greater fairness and transparency in the industry resulting in lower costs for investors.”
Vanguard manages over US $1.8 trillion in assets and serves more than 23 million individual and institutional accounts worldwide.