Digital platforms cheaper for investors than traditional brokers, says ESMA

The European Securities and Markets Authority (ESMA) recently released its first comprehensive assessment of the total costs borne by investors in UCITS and AIFs.

UCITS are EU-regulated retail investment funds designed for everyday investors and subject to strict rules on diversification and investor protection.

AIFs are alternative investment funds such as hedge funds, private equity, and real estate funds that fall under a separate regime and are typically aimed at professional investors.

ESMA, the European Union’s financial markets regulator and supervisor, said the report marks the first time a complete evaluation of charges applied to investors in EEA investment funds has been carried out.

The report highlighted an innovative analysis of distribution costs, which represent 48 per cent of the total costs associated with UCITS.

These elevated costs are largely the result of the traditional and prevailing involvement of credit institutions and investment firms in the distribution chain across numerous member states.

Digital platforms, including neo-brokers that provide execution-only services, are shown to be less costly alternatives.

ESMA also confirmed that inducements have a significant influence on ongoing costs.

It found that when inducement arrangements exist between a distributor and the manufacturer of a UCITS in the context of non-independent advice, these payments can make up as much as 45 per cent of ongoing costs.

ESMA said “this analysis was enabled by an ad-hoc data collection exercise and provides a useful contribution to the ongoing SIU debate, especially in relation to retail participation”.