Vanguard calls for fund fee transparency

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Vanguard Group Inc updates

Investment funds should publish easy-to-compare fee figures in the same way food labels carry nutritional values to make clear to the public when costs are “hazardous”, according to Vanguard.

Sean Hagerty, European head of the world’s second-biggest asset manager, said ordinary UK investors were still unaware of the extent to which fund fees could limit their returns.

“Investors need to be better informed about the costs they pay,” he said. “High fund fees can be hazardous to your wealth in the same way that high calories can be hazardous for your health.”

A UK saver with an initial £10,000 investment in a 60/40 stock and bond portfolio that delivered annual returns of 4.5% would have a pot worth £37,450 after 30 years with zero fees, £32,430 if they were 0.5 per cent a year and just £20,970 if the figure was 2 per cent.

Hagerty was speaking after the Financial Conduct Authority, the City regulator, issued a sharply critical analysis last month of assessment of value reports, which investment companies have been required to publish since 2019.

Value assessments were introduced by the FCA to stimulate competition and reduce fund fees but the process has been undermined by suspicions that managers are “marking their own homework” to present themselves in a favourable light.

The FCA expressed concern at the credibility of “too many” asset managers’ reports and warned that it expected “more rigour” when assessing value for investors.

Independent non-executive directors who sit on fund boards are supposed to champion investors’ interests when approving value for money assessments. But the regulator found that INEDs “in many cases” did not have a good understanding of the rules or of the role expected of them.

Only one in five retail investors have read a value for money assessment, according to consumer advice group Boring Money, which collected data from 6,500 fund holders last year.

Even fewer financial advisers pay attention to the reports. Just 6 per cent had read a value assessment, according to research carried out last autumn by The Lang Cat, an Edinburgh-based consultancy.

“Questions about value are percolating into more retail investors’ minds. But most of the reports were pretty turgid and the FCA was right to challenge asset managers about their reporting standards,” said Holly MacKay, the founder of Boring Money.

Retail investors needed a fund’s total costs and performance net of all charges to be presented alongside a relevant peer group with a clear explanation of how value had been delivered by a manager, said Mackay.

Boring Money’s poll of retail investors ranked Vanguard as the top manager for value in 2020, followed by HSBC and Axa Investment Managers.

“Seventy-five per cent of Vanguard’s UK funds are cheaper than the average OCF [ongoing charges figure] for their respective Morningstar categories. We want to reduce the overall cost of investing — including fees for advice and platform fees — so that customers can keep more of the returns they earn,” said Hagerty.

Vanguard’s UK business has seen a sharp acceleration in growth during the coronavirus pandemic, with its UK customer base jumping from 80,000 at the end of 2019 to 300,000. Rapid growth in the UK has helped to push assets managed by Vanguard in Europe to $293bn, up from $213bn at the end of 2019. 

It has recruited more than 100 new employees during the pandemic, taking the total number of staff in Europe to 800.

Hagerty said “several hundred more” staff would be required to deal with the increase in client numbers which had strengthened confidence among Vanguard’s senior leadership about its growth prospects in other European markets, such as Germany and Switzerland. 

“We knew that it would be more challenging to build a direct to consumer business in Europe than in the US. But the experience in the UK has emboldened our ambitions to bring better value for money to investors throughout Europe,” said Hagerty. 

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