Two thirds of IFAs say cost ‘most important factor’ when choosing passive

Feb 28th, 2012 | By | Category: Fixed Income

New research among IFAs by Legal & General Investments has shown that cost is the most important factor when choosing a passive investment provider, according to two thirds (65%) of advisers.

Two thirds of IFAs say cost 'most important factor' when choosing passive

Simon Ellis, MD of L&G, says: “Research highlights how important cost has become in a period of significant market volatility.”

Simon Ellis, Managing Director of Legal & General Investments, says: “The result of this research highlights how important cost has become in a period of significant market volatility and straightened times.”

A third (33%) of respondents ranked reputation and longevity of investment provider highest, followed closely by the range of passive funds available (32%). Almost two thirds said that the size and scale of investment provider was ‘quite important’ and contributed to overall decision making.

IFAs’ concerns about fees reflect analysis produced by Vanguard, which points to the importance of costs.

According to Vanguard, while performance is clearly important as it is the growth engine of investors’ returns, performance is unpredictable. Data shows that the majority of active managers fail to beat their benchmark and even those that do excel do not do so with regularity.

One discernible investing factor known at the outset, says Vanguard, is that costs matter. Simple arithmetic demonstrates that an investor paying a total cost to invest of 2% will have lost 40% of their portfolio return over 25 years.  Traditional investment marketing suggests this price is worth paying for the outperformance earned. Looking at the actual data confirms this isn’t the case.

Indeed, Morningstar, purveyor of fund ratings, confirms that the best indicator of future performance is low fees. They make this observation after noting that there is a direct inverse correlation between quartile investment return and high fees.

Nick Blake, head of retail at Vanguard, says: “It is no wonder, therefore, that wise investors have worked out that the way to win is not to lose. This means, having earned a portfolio return, they ensure it goes into their own pocket and not into the pocket of investment managers and administrators.

“So, it is incumbent on the industry to give investors the best possible information to inform their investing decisions. Transparency should be delivered with the aim of helping the buying decisions of investors and exposing biases that prevent investors having access to the best solutions. If transparency also has the affect of forcing down the ‘total cost of ownership’, this has to be good news for investors.”

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