No tea for you

Europe is a strange market when it comes to retail investment products. On the one hand, the UCITS structure allowed European and UK individual investors to have access to all sorts of interesting strategies before they were widely available here in the States (absolute return funds, for example). But they also charge shockingly high fees that would be grossly uncompetitive here, as do the advisors who layer their own fees on top of the fund charges. A recent study by a unit of the FT quantified the losses to individuals’ personal pensions (a sort of cross between an IRA and a 401k plan):

Money Management, the Financial Times magazine, has calculated that a saver making monthly contributions of £200 over 25 years could lose up to £37,000 – almost a quarter – in charges, assuming investment growth of 7 per cent a year.

On a single lump-sum contribution of £10,000, the impact of fees is greater, with one Skandia fund losing 39 per cent of its potential value in charges over the same period.

It’s still not clear to me why the industry is able to get away with this, though the fragmentation of European distribution (where you can centralize “manufacturing” of portfolios in London but need locals to sell in each country) could work against the logic of fully competitive prices. After all, why lower your price to gain volume if that just means you need to hire more people in Rome, Berlin, Geneva and Madrid?

The article closes by noting the driver of demand for these “investment” products in the UK:

The number of personal pensions has risen as workplace retirement schemes, which guarantee to pay employees a portion of their salary, have all but disappeared.

And I’m reasonably confident that the reason they disappeared is driven by the same logic (and clearly prone to the same failures) as contracting out. Great for shareholders, terrible for everyone else.

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