Digital platforms have emerged as a more cost-effective option for investors compared to traditional brokers, according to a recent report by the European Securities and Markets Authority (ESMA).
- Digital platforms have emerged as a more cost-effective option for investors compared to traditional brokers, according to a recent report by the European Securities and Markets Authority (ESMA).
In its first comprehensive assessment of the total costs faced by investors in UCITS (Undertakings for Collective Investment in Transferable Securities) and AIFs (Alternative Investment Funds), ESMA has provided valuable insights into the financial landscape for retail investors. UCITS are regulated investment funds tailored for everyday investors, subject to strict diversification and investor protection rules. AIFs, on the other hand, encompass a wider range of investment vehicles, including hedge funds and private equity, primarily aimed at professional investors.
ESMA’s report marks a significant milestone, being the first complete evaluation of charges applied to investors in European Economic Area (EEA) investment funds. The findings indicate that distribution costs constitute a staggering 48 per cent of the total costs associated with UCITS. This high percentage is attributed to the traditional involvement of credit institutions and investment firms throughout the distribution chain across various EU member states.
In stark contrast, digital platforms, including neo-brokers that offer execution-only services, have been highlighted as less costly alternatives for investors. These platforms have gained traction by providing users with a more straightforward and affordable way to manage their investments.
Moreover, ESMA revealed that inducements play a considerable role in ongoing costs. The report indicated that when inducement arrangements exist between a distributor and the manufacturer of a UCITS, particularly in the context of non-independent advice, these payments can account for as much as 45 per cent of ongoing costs. This reliance on inducements raises questions about the transparency of cost structures in traditional investment channels.
ESMA’s analysis was facilitated by an ad-hoc data collection exercise, providing critical information that contributes to ongoing discussions regarding retail participation in investment funds. The findings underscore the need for investors to be aware of the costs associated with different investment avenues and to consider digital platforms as viable options.
