A Push into Passive Funds

Advisers may start pushing their clients away from actively managed funds and towards passive funds and ETFs

Fundscape 28 November, 2012 | 4:13PM
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This article was written by Helen Pridham, the director of Fundscape. It was written specifically for Morningstar’s special series about the Retail Distribution Review (RDR) in the UK. It is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors. This articlewas updated January 2013, after originally being published November 2012.

The Financial Services Authority’s (FSA) new rules about how investment products are sold to individual investors were implemented at the start of 2013. The Retail Distribution Review (RDR), which outlines the new industry rules, was designed to ensure that individual investors get a more fair, transparent deal. But it looks like these new rules will have a variety of unintended consequences for both investors, advisers and investment providers. For example, the new rules could leave some investors without any advice if they cannot pay for the advice in a more upfront manner. The rules are also encouraging a move towards the increased use of passive investment funds by financial advisers, mainly for cost reasons. 

The Move Towards Passive Funds

Passive funds such as exchange-traded funds (ETFs) aim to track the performance of stock market indices, such as the FTSE All Share index.  To achieve this goal, they either buy all the shares in the index, invest in a representative sample or use other types of investment vehicles to track performance. The annual charges on these funds are low because they require very little active management and oversight; computers are generally programmed to track the relevant indices and this is relatively cheap.

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Fundscape  is a research consultancy specialising in all aspects of the UK fund industry.