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EFAMA Promotes TER Report to Improve Transparency of Investment Fees

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A report commissioned by the European Fund and Asset Management Association (“EFAMA”) published today aims to give investors greater transparency and understanding of cost breakdown within the Total Expense Ratio (“TER”) of European mutual funds.

As part of its on-going campaign to promote investor education, EFAMA believes greater transparency is needed to reveal the breakdown of fees within the TER of funds so investors understand what they are paying for. While it is currently possible to project the TER through mutual fund expense information, it is not possible to deconstruct the ratio to fees collected by distributors, administrators and custodians and what is retained by the fund management firm.

The current bundling of distribution and management fees has made it difficult to understand the costs charged by various types of organisations in the fund value chain. The report benchmarks how much on average of European funds’ TER are paid, by the survey participants, to investment managers, fund distributors and other services providers (e.g. fund administrators, custodians). In the sample the breakdown of TERs reveals that, on average, UCITS fund managers retain around 42% of fees and charges while the majority of the remaining 58% is paid in retrocessions to distributors and a smaller proportion paid to other operating services such as administration.

The report also reveals that investment management fees in Europe are on average only about 3 bps greater than management fees in the US across all asset classes, if you exclude the top three mega managers*. This is despite the US’ economies of scale. However, unlike the US, European players operate against a backdrop of 27 languages and varying local regulatory and tax regimes, further increasing their costs.

As the European fund industry expands and matures, operational efficiencies should enable the reduction of fund expenses over the medium and longer term. Such evolution could be enhanced through greater ongoing clarity and transparency with the breakdown of fees in the fund value chain. UCITS IV promises to facilitate scale efficiencies through cross-border mergers and master-feeder structures enabling lower investment management fees.

This report forms part of EFAMA’s strategy to improve investor confidence and set the scene for sustainable growth in the European asset industry. EFAMA’s strategy is built around five priorities: promoting long-term savings, encouraging investor information and education, supporting beneficial regulatory measures, expanding the UCITS brand in Europe and beyond, and demonstrating the importance of industry professionals to the economy.

>Massimo Tosato, Vice-President of EFAMA and Chair of the TER Working Party Group, comments: “EFAMA has long argued that transparency needs to be improved at the point of sale and harmonised for all products. We would also encourage a similar transparency within the EU across all long term saving solutions, including insurance and structured products.  This report was a unique opportunity involving 17 EFAMA corporate members, accounting for over €1trillion in EU domiciled funds, to benchmark and disaggregate mutual fund fees. It therefore goes some way to support our aim towards improved transparency of fees and in giving investors more independence with their long terms savings and investment needs.”

Claude Kremer, President of EFAMA, further comments: “The report aims to meet our strategic goal to provide investors with information and encourage responsible investor behaviour. It also supports beneficial regulatory measures such as MiFID by providing further transparency of charges.”

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