High cost investing: Is this a tipping point?

Nick Blake, head of retail sales at Vanguard Asset Management, on whether we have reached a tipping point on fund costs.

In his book Tipping Point, Malcom Gladwell explores how phenomena like fashion crazes, Rubik’s cubes or viruses suddenly take off. He concludes that such ‘tipping points’ can be created, but they require three key ingredients:

• An environment ripe for change.
• A simple compelling message.
• Passionate messengers.

Remember that cool kid at school, the one that always wore the latest thing? A passionate messenger with a simple fashion statement where everybody was waiting for the next change – all elements were there. The question is, have we reached such a tipping point that signals the end of pointlessly high cost investing?

Value for money

The era of transparency that RDR will herald will certainly put the spotlight on value for money and has already sparked a fierce re-examination of costs in the fund management industry. But has the debate resulted in a tipping point on investment costs?

The recent European Fund Fee Analysis from Cerulli Associates, shows that fund fees across Europe have remained stubbornly high, despite an increase in AUM and competition. Indeed a recent study from Lipper showed that of those managers that changed their fees in the last ten years, 80% increased them.

Investor choice

Perhaps it signals that competition has not really been strong enough to have an impact. It could also indicate that a lack of transparency is affecting investor choice or that when returns are high, investors were discounting costs.

Both the Lipper and Cerulli reports show the tide is turning and the data for the last ten years 
betrays a change in the last two years, particularly in the UK. The launch of a series of ‘RDR ready’ and low cost funds in the UK show things are improving. But are we at the tipping point? To answer this question, I will try to see if Gladwell’s three criteria are in place.

1. An environment 
ripe for change?

Yes, the environment looks ready to change, based on both regulatory and investor pressures. Investors know that achieving a sustained period of high returns looks difficult. They are focusing increasingly on ‘not losing’ and by capturing as much of the long-term equity risk premium as possible. When they make a return on their capital, they want to keep it, not give it to the manager.

The regulator appears to believe that things are not working as they should and is demanding better transparency and better outcomes for investors. Some managers may argue that transparency can confuse investors, but it is difficult to point to an instance when transparency produced a bad outcome.