Europe's fund expenses at a crossroads
The benefits of mutualizing the cost of distribution
The combined effect of cost mutualization, fee transparency and tightened inducement rules will eventually trigger the long-awaited alignment of European fund expenses with their U.S. peers
The global investment fund industry is much larger today than it has ever been. Its European component more than doubled in size over the past ten years, with total assets under management surpassing the €10 trillion mark in the course of 2015.1 Against the background of the deepest global recession since World War II, a major political crisis, and an unprecedented number of regulatory initiatives, such a strong and sustained growth emphasizes the attractiveness of investment funds and the success of the UCITS brand.
Despite these impressive achievements, the industry will still have many challenges to overcome in order to secure and strengthen its growth. This report originates from the observation that three trends will directly impact the future success of our investment fund model:
- The strong expansion of non-European fund domiciles, as their share of global GDP and financial wealth significantly increased over the last 10 years.
The development of passports and trade agreements within these emerging regions represents both a challenge and an opportunity for the European fund industry.
- The financial requirements of an ageing population and the need to provide cost efficient pension solutions via well-governed, diversified and risk managed collective investment schemes.
- The public demand for increased investor protection and systemic stability of the financial system, with a potential growing role for non-bank financial solutions and intermediaries.
In light of these opportunities, this report argues that the European fund industry should both control product expense and limit the cost of distribution. While the former will help unlock the investment potential of European savings (41 percent of European household wealth is still held in cash accounts), the latter will improve the competitiveness of investment funds against other financial instruments.
In their constant aim to improve processing efficiency, market players should assess the opportunity to mutualize elements of the distribution supply chain, hence reducing costs against the highly efficient nature of other, more mature, asset classes.
In the general context of enhanced investor protection, the review of the Markets in Financial Instruments Directive (MiFID II) will drive a significant reduction in European expense ratios, domestic and cross-border alike. The combined effect of cost mutualization, fee transparency and tightened inducement rules will eventually trigger the long-awaited alignment of European fund expenses with their U.S. peers.