BlackRock, the world’s largest asset manager, is set to pass on economies of scale to investors by cutting fund fees as assets grow.
From the 6 October 2023, it will apply tiered pricing to 41 actively managed funds used by retail investors.
“This allows BlackRock to pass on savings associated with economies of scale that are achieved when a fund increases significantly in size,” the group said.
Discounts will kick in once assets go above £1 billion. The below table shows a worked example of tiered pricing in practice for a hypothetical fund with a base charge of 0.75% under the standard discount schedule.
|AUM||Discount schedule||Hypothetical worked example|
|£0 to £1bn||No discount||0.75% fee as starting point|
|£1bn to £3bn||5% incremental discount||0.7125% fee on assets in this tier|
|£3bn to £5bn||7% incremental discount||0.6975% fee on assets in this tier|
|£5bn +||8% incremental discount||0.69% fee on assets in this tier|
Some funds will not be covered by the changes. These are institutional investor funds, where the fees are separately negotiated with fund investors; index and index-like strategies, as they are priced at scale at launch; and Consensus and MyMap strategies on the basis that these strategies primarily use index funds as building blocks and have limited to no opportunity to share further scale benefits.
The cost-cutting follows the implementation of the Financial Conduct Authority’s Consumer Duty standards for the protection of consumers, which came into force on 31 July. The Duty requires firms to act to deliver good outcomes for retail customers.
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Fund managers are therefore under pressure to deliver better value to investors and must carry out annual value for money assessments of their fund range as part of this process.
Part of delivering value, according to the FCA’s rules, is to pass on economies of scale to investors.
However, in reality most fund firms do not pass on economies of scale. With open-ended funds, the same fee is generally levied even if the fund grows from £100 million to £10 billion.
In contrast, many investment trusts pass on economies of scale by having a tiered fee-charging structure. Research highlighted by our columnist Ian Cowie found that more than a third of the 175 investment trusts that have reduced their charges over the past decade have introduced a tiered fee arrangement.
When it comes to active fund management charges, most firms toe the line and quote an ongoing charges figure (which does not include transaction costs) of around 0.8%-1%
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