Ensuring value for money in fund recommendations

dried peas in a balance scale

For adviser use only


The Financial Conduct Authority’s (FCAs) recent Asset Management Market Study highlights the impact that fund management charges can have on an individual’s savings. Of course, charges are only part of the story. Funds with higher charges can represent value for money – for example, if their investment strategy offers an improvement in growth potential, or if it limits the chances of investment loss.

We need to take a rounded approach to assessing value for money. After all, it’s as important for advisers to look at what savers could get in an outcome, as it is for them to look at what they’ll pay in charges.

Increased focus on value for workplace funds

The FCA study states that over 9 million individuals in the UK are now saving for their retirement through defined contribution pension schemes – these schemes made up nearly half of the total market they assessed. There has been a huge increase in the numbers of people saving for retirement in this way as private sector defined benefit schemes continue to be phased out and auto-enrolment has brought new savers into this market.

Company pension schemes have seen a big focus on value in recent years. Workplace personal pensions now have Independent Governance Committees to hold providers to account for delivering value for money, and for all other trust-based schemes, trustees have a duty of care to members.

Research by the Pensions Regulatorfound that, where a default fund was offered, 62% of members were solely invested in it. The introduction of the DWP price cap of 0.75% means that pricing is now strictly controlled where savers haven’t made an active fund choice.

However, employee engagement is also really key to ensuring value for money. While curbing costs for those who don’t choose acts as a control, value for money will mean different things to different savers. Supporting workplace savers to make investment choices based on their savings needs, risk appetite and individual circumstances can go a lot further.

Retail savers supported by sound advice

In the retail market, approximately 78%**  of retail investment fund sales in 2015 were advised, and so in this market advisers are in a strong position to ask the right questions to ensure their clients get a good deal. Regular reviews should include a value for money assessment as standard.

Charges are undoubtedly part of these assessments, and the FCA study questions how charges are being disclosed – whether there should be an all-in charge or one broken down into its constituents, and whether transaction costs should be included or not. We believe keeping transaction costs separate will avoid confusing different types of charge and make it clearer to investors what they’re paying for what. But what they’re getting in return for charges is also key.

A great deal of information is now available to help advisers assess whether savers are getting what they pay for – various measures of performance, details of assets and holdings, risk/return and volatility data. A number of providers also publish governance reports on key fund ranges, outlining the fund monitoring that they perform on their funds. It is getting much easier for those in the know to appraise funds.


- Does the design support the stated objective?

What is the fund manager’s investment process? Does the fund have a risk management strategy?

- Have long-term performance objectives been met?

Where a fund is designed to be held for some time, prioritise long-term figures. Shorter-term ups and downs often even out over time, but can also suggest a change in the management process, so it’s important to understand what caused any changes.

- What is the manager’s approach to asset allocation and stock selection?

How does it contrast the benchmark? And why do they believe this will drive the sort of returns the fund aims for?

- What is the tracking error?

A low figure should be a good thing in a tracker fund, but could suggest that your clients aren’t getting what they’ve paid for if the fund is actively managed.

- Is the cost justified?

Taking the above factors into account, is the strategy likely to compensate for the charges levied?

Value is not the same as cost

Value is not just about what your clients pay for something, it’s what they get that determines whether or not they’re getting value for money. Following the FCA review, it’s more important than ever that advisers are vigilant when recommending funds, to ensure that the funds are delivering value for their clients. However, this doesn’t mean any given fund is automatically dismissed because it’s more expensive. It simply means that your clients should get what they pay for..

 *DC trust: a presentation of scheme return data 2013 – 2014. It provides a high-level snapshot of the landscape of occupational DC trust-based pension provision in the UK. It's based on a wide-ranging data set covering around 40,000 current schemes from the pension schemes register, with an effective date of 31 December 2013.

**P46, 4.8, Asset Management Market Study, Interim Report, Financial Conduct Authority, November 2016. MS15/2.2