RDR Fuels Demand for Low-Cost Funds

ETF TIMES: Recent evidence has shown that the Retail Distribution Review has spurred on investors to find cheaper products, while providers are responding with even lower costs

Lee Davidson 5 June, 2013 | 7:00AM
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RDR Fuels Demand for Low-Cost Funds

European providers of exchange-traded products have noted a substantial uptick in inflows into passively managed investment products in the wake of the onset of the UK’s Retail Distribution Review (RDR) this year. Prior to the introduction of RDR, analysts noted that its introduction should result in an increased investor appetite for lower-cost passive investment products, since RDR effectively abolished commission payments from fund providers to financial advisers. The predictions, so far, have proven to be accurate.

According to Ignites Europe, Vanguard has quickly established itself as one of the leading fund families on Cofunds, one of the UK’s largest platforms. Since reaching a distribution deal with Cofunds last year, Vanguard has quickly become the fourth most popular fund family on the platform as of the first quarter of 2013, according to data from Cofunds. According to Nick Blake, Vanguard’s head of UK retail, RDR has proven to be a significant “boom” for Vanguard’s fund business in the UK. Other passive fund providers have enjoyed similar success noting RDR as the primary cause. In a recent interview by Fundweb, Pollyanna Harper, iShares' head of UK intermediary sales, stated that “in the three months since the implementation of the RDR, we’re encouraged to see a steady increase in the amount of assets advisers are holding in ETFs through platforms.”

In related news, Morningstar released its 3rd annual Global Investor Experience report in May, a comprehensive overview of the experiences of mutual fund investors in 24 countries worldwide. The UK received a grade of B- up from its 2011 grade of C+ indicating. Overall, Morningstar’s analysts cited above-average grades in regulation and taxation as well as sales practices as the key drivers behind the improved marks. However, the UK rated below-average in the disclosure and fees categories. According to the report, “The UK received high marks for the dominance of open-architecture distribution in the market, giving most fund investors a wide array of choice. It was also noted that the Retail Distribution Review should ensure that investors have more choice across different vehicle types. The UK’s tax regime for fund investors, specifically with respect to capital gains, was also cited as being better than average. Conversely, the move from the simplified prospectus to the KIID detracted from the UK’s disclosure grade. The Morningstar report found that fees remained a relative weak spot for UK funds, but noted that this is expected to improve in the wake of the Retail Distribution Review.” Not only, therefore, is RDR poised to bolster the asset flows of passive product providers in the UK, but should also work to improve the average fund investor’s experience.

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Lee Davidson

Lee Davidson  is an ETF analyst with Morningstar Europe.