EFAMA released today issue number eight of its Market Insights series titled 'The Costs of UCITS and US Mutual Funds - We can only compare like with like'. This report compares the costs of UCITS and US mutual funds, taking into account various cost calculating methods, as well as the differences in fund distribution between Europe and the US.
It is often argued that European citizens cannot fully benefit from the single market for investment funds, as, presumably, the cost of UCITS is higher than the cost of mutual funds in the United States (US). The key findings of EFAMA’s analysis paint a more nuanced picture.
When comparing like with like, US mutual funds are not necessarily cheaper than UCITS.
• The simple average product cost of actively managed long-term and index-tracking equity funds offered to retail investors, i.e. the cost of the fund excluding the costs of distribution and advice, is currently slightly lower in Europe than in the US.
• The cost of ownership of US mutual funds can on average be at least as high or even higher than the cost of UCITS when US investors pay for holistic financial advice (where the adviser considers a consumer’s overall financial circumstances and objectives and makes recommendations to meet them).
• This result is relevant in the debate around a possible EU-wide ban on ‘inducements’ as it indicates that there is no guarantee that unbundling of the product and distribution costs will necessarily lead to a lower all-in price for retail investors. It is clear, however, that most investors cannot understand whether they are paying for the financial product, investment advice, or both combined. It would therefore be advisable to reassess the sheer volume of existing cost and charge disclosures to ensure that consumers realise how much they are paying, what they are paying for the quality of the product offered and the advice services provided if any.
The asset-weighted average product cost of US mutual funds is significantly lower than that of UCITS.
The report describes three main reasons for this. Firstly, the size and high degree of integration of the US mutual fund market allows fund managers to benefit from a large client base and generate important economies of scale in the US. Secondly, mutual funds play a major role in the US retirement system, in particular through their 401(k) and other retirement accounts, which often invest in institutional low-cost share classes. And thirdly, institutional shares are included in the calculation of the product cost of US mutual funds, which is not the case for the UCITS covered in this study.
Bernard Delbecque, Senior Director of Economics and Research at EFAMA, commented: 'Our findings highlight the significance of two policy objectives for the European Union: the need to further deepen the single market for UCITS and the importance of achieving the Capital Markets Union project, in particular in the area of pensions and investor education.'