passive investment takes off

Sylvain Meyer

Sylvain Meyer                                                                                                    photo: gambastyle

investment advice changes

The Retail Distribution Review (RDR), introduced by the Financial Conduct Authority (formerly the Financial Services Authority) with effect from 31st December 2012, has certainly shaken up the provision of investment advice in the UK.

In our view, the two most important aspects of the RDR have been, firstly, the new obligation on financial advisers to consider all investment options available to UK investors.  Secondly, the ban on commission payments from investments and the consequent requirement to agree a fee with the client for their services. 

Future Perfect has worked in this way since 2005.

passive investment options

It might surprise you that independent financial advisers have not always been obliged to consider all investment options available.  The previous regime enabled many advisers to ignore options such as passive funds (also known as tracker or index funds) and Exchange Traded Funds (ETFs), another type of passive investment vehicle.

The more cynical may wonder if this might, at least in part, be due to the fact that most passive funds and ETFs paid little, if any, commission historically.

increased uptake of passive investments

Now the advice regulations have been reset, there has been an increase in interest and sales of passive investments as more and more investment professionals are persuaded, as are we, by the arguments in favour of a passive investment approach in serving the best interests of their clients.

The latest Investment Management Association statistics for Q2 20131, show a significant increase in passive investment sales versus Q2 2012 of 125%.  This compares with a general uplift in investment sales between the two periods of just 20%.

We believe that this is the start of a long term trend within retail investment sales.  We expect passive investments to grow as a percentage of overall retail funds from its current level of just 9.5%1 up to levels more in line with United States investors of 26% (up from 12% a decade ago)2.

competitive pricing pressure

One benefit of the increased uptake in the passive investment market is the corresponding increase in competitive pricing pressure.

For example, the largest provider of passive funds in the UK and also the longest established, Legal & General, reduced their charges for all their passive funds in 2012, following a similar reduction in 2011.

This is clearly a response to the threat presented by other current fund managers in the passive market, but also newer entrants such as Black Rock who have recently introduced some very keenly priced funds.

bigger funds = lower costs

Another benefit of increases in the passive market is the consequent rise in the size of the individual investment funds.

As many of you know, in addition to the Annual Management Charge levied by fund mangers, funds have additional, largely fixed, costs – such as audit, administration and legal costs.  The total costs to investors (including the Annual Management Charge, but also these other costs) is expressed as the On-going Charge3.

Larger funds have lower On-going Charges, closer to their Annual Management Charge, because these fixed costs represent a lower proportion of the overall costs.

savings for you

It’s interesting to observe how this reduction in costs translates for future perfect clients.  Comparing our future perfect portfolios from November 2007 and now, overall the on-going charge has certainly reduced.

the photo

It’s of an beautiful artwork by the Swiss land artist Sylvain Meyer.  You can see more of his delightful work here on flickr.

any questions?

If you’ve got a query about this, or any other aspect of your financial life, Nick would be delighted to help.  You can email him on

the small print

This commentary is provided for information purposes only and does not constitute advice to invest or not invest.  Advice should always be obtained from an adviser before the decision to invest or sell is taken.  Past performance is not a guide to future performance.

1  Investment Management Association – Investment Fund Statistics, 29 August 2013.
2   Morningstar – 2012 Annual Global Flows Report, March 2013.
3   Previously known as the Total Expense Ratio, or TER.