EU Retail Investors Pay Up to 30% of Their Returns to Fund Fees

The EU’s main securities regulator today issued its second report on the cost and performance of retail investment products. The analysis, which complements ESMA’s risk assessment and supervisory work, covers Undertakings for Collective Investment in Transferable Securities (UCITS), Alternative Investment Funds sold to retail investors (retail AIFs) and Structured Retail Products (SRPs).

Among other things, the report shows that the total costs of UCITS funds still present a significant drain on fund performance, impacting retail investors to a much higher extent than institutional investors.

The impact varies across asset classes, but overall retail fund investors paid up to 40% more than institutional investors on average across asset classes.

On average, retail clients paid 28 percent of their initial investments in costs during the period from 2009 to 2018. This also represents 30 percent of their gross returns with on-going costs such as management fees constitute over 80 percent of the total cost paid by customers. A previous analysis showed they lose up to a quarter of their gross returns in costs and charges.

The ESMA ESMA European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t Read this Term also noted that while management fees were the main component of investment companies’ high charges, the fund entry and exit fees have a more marginal effect.

In terms of overall returns, the report stated that UCITS funds saw outperformance over passive and ETFs UCITS funds, but the difference was not high enough to compensate their higher costs, which led to lower performance net of costs for active compared with passive. Costs were higher than 1.5% in the case of active equity UCITS while they hovered around 0.6% for passive and ETFs UCITS, on average.

“Gross returns were negative for the types of AIFs with large retail investor shares: -2.1% for funds of funds and - 3.3% for the category Other. This reflects the poor performance observed across asset classes, especially at the end of 2018,” the report further explains.

Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA), said: "In this second annual report we continue to see the high impact of costs on the final returns that retail investors receive on their UCITS investments. The costs paid by retail investors are significantly higher than those paid by institutional investors, leading to lower net returns for this category of investors."

The EU securities regulator carries out this annual report for the European Commission as part of their joint efforts to increase retail investors’ participation in capital markets.