Data crunch: Broadridge Financial Solutions’ Jonathan Libre dissects the ongoing debate around cost versus quality when it comes to delivering value to members, and why the market might be shifting away from a focus on low costs.
Members have benefited from paying lower fees, all other things being equal, but there is an ongoing debate about the meaning of ‘value’ in the context of DC and whether schemes are missing out on quality by focusing on cost.
The charge cap was imposed in 2015 to protect members from inappropriately high fees. This precipitated an immediate reduction in average annual member charges as schemes charging higher fees were brought into compliance.
The move has had a lasting impact as member charges have continued to fall. Broadridge estimates suggest that average member charges fell to 43 basis points in 2018, well below the 75bp charge cap.
While lower fees reduce the drag on investment returns, placing the emphasis on cost alone may well result in fiduciaries losing sight of value, a metric that includes the quality of the investments as well as the broader service offering.
Why value is so difficult to gauge
Evidence suggests that fiduciaries have generally focused heavily on ensuring members pay low charges.
Indeed, a recent Broadridge survey of large scheme fiduciaries found that when referring to charges, respondents were far more likely to mention low cost rather than value as an indicator of a good DC scheme.
A key explanation behind the results is that charges are easily measurable and known beforehand.
By contrast, value is harder to gauge given that it is likely to rely on factors that are not known in advance such as investment performance. This issue has been complicated by the fact that low-cost passive investments have outperformed many higher-cost active strategies in recent years.
The debate around cost versus value has been thrust into sharp relief recently due to growing calls from various stakeholders, including the government, for DC schemes to embrace alternative asset classes.
These investments often demand higher fees, as well as a performance fee component, that places them out of the ambit of charge-cap constrained schemes.
It is difficult to argue that this limitation to the scope of viable investments is a good thing for members. However, the government’s actions in reviewing the charge cap and pushing alternative investments higher up the DC agenda are positive developments.
Similarly, it is encouraging to see innovative behaviour from asset managers and pioneering schemes in finding ways to bring illiquid asset classes into DC portfolios.
Hopefully, these are signs that the market is shifting away from a focus on low cost and towards one in which value and quality are deemed more important considerations.
Jonathan Libre is principal in the Emea Insights team at Broadridge
