Passive funds set to prosper from RDR

Passive funds are expected to grow in popularity in the post-retail distribution review (RDR) environment as product bias diminishes.

While a personal, rather than a house view, Schroders head of intermediary sales Neil Bridge says passive and passive-plus type products could become up to twice as important in a typical client portfolio as advisers struggle to justify active fund charges.

He says currently, most unit trusts will pay out typically 1.5% annual management charge, comprising 0.5% adviser commission and the remainder split between the fund group and the platform.

Pre-RDR, Bridge says a client might have been paying 3% initial costs and 0.5% trail commission.

However post-RDR, this translates to 3% commission upfront (which would be classed as a fee), which on a £100,000 portfolio, equals £3,000, while on a £500,000 portfolio, this relates to £15,000, plus £500 a year trail in the first instance.

While Bridge says this is reasonable for proper client servicing, the annual cost might go up, but the initial commission will go down, in line with customer agreed remuneration.

He says: "It is not unreasonable to expect that as there becomes margin pressure on AMCs, lower cost products will start to feature more in the advisers' armoury.

"Intermediaries are going to potentially struggle to charge the 3% fee because it looks rather a lot, however consequently 50 basis points a year, or £500 is not really enough for proper client service."

Bridge adds: "They could start looking at a proportion of lower cost products - like passive or passive-plus vehicles at 35 or 40 bps, once you add on your platform cost of 30 bps and your 1% management fee, you are only back to where you were in terms of total cost to the client as when buying an active fund.

"It begs the question why the likes of Vanguard has chosen now to enter the UK market."

HSBC Global Asset Management head of UK external distribution Phil Reid agrees passive funds will grow in popularity, saying given the level of due diligence required, advisers will seek simpler products.

He adds in major developed markets it is harder for active managers to outperform, hence index trackers make sense in those markets.

As such, he sees passive products taking a larger slice of clients' core equity exposure.

samantha.shaw@incisivemedia.com