Gareth Shaw: Will Vanguard force fund managers to up their game?

Vanguards move to allow customers to buy its low-cost funds directly  has the potential to shake up an investment sector in desperate need of a jolt. Picture: Getty
Vanguards move to allow customers to buy its low-cost funds directly has the potential to shake up an investment sector in desperate need of a jolt. Picture: Getty
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Consumers have been at the heart of everything we do at Which? for 60 years. Their views and experiences shape all of our activity – from how we test products and campaign for change, to the ratings we give to companies from dozens of sectors.

For example, every year, Which? asks thousands of consumers to rate the supermarkets they use. Over the past few years, we have seen a remarkable shift in people’s perceptions of the big brands and how they do their shopping.

First seen as “discount” stores, Aldi and Lidl have now risen above many of the UK’s long-established supermarket giants, to be among the most popular and well-loved brands. Their combination of great products and low prices have become appealing to consumers, who’ve rated them almost as highly as the much-loved Waitrose and M&S.

So, it seems that with the emergence of new competition, many supermarkets have been forced to up their game – from pricing to produce - resulting in a better all-round consumer experience.

Is the same about to happen in the investment industry?

Last week, Vanguard – a US-based ultra-cheap passive investment company – launched a website allowing consumers to buy its low-cost funds directly, without needing to go to a third-party platform. And its presence has the potential to shake up a sector in desperate need of a jolt and improve customer outcomes.

In 2016, the Financial Conduct Authority (FCA) published a stinging report into the investment industry. Too many actively managed funds, the FCA said, charge high fees and deliver below average returns. There’s little to no competition on costs, with most funds charging the same amount. In an era of low interest rates, the regulator’s chief executive, Andrew Bailey, said fund managers must do more to help their customers get the best return on their savings – £4 trillion of which sits in investment funds.

And, although the regulator has yet to publish its final plans to clean up the asset managers, it appears that the days of getting away with charging the same old fees, for poor performance, are numbered.

Vanguard’s response to this has been to launch a service with a “platform fee” – the annual administration charge to invest on its site – levied at 15p for every £100 you invest. This undercuts every single one of their fund supermarket rivals, making it the cheapest of the platforms that charge in this way.

This is no endorsement of its services, of course. And Vanguard doesn’t yet offer all of the services self-directed investors have come to enjoy and expect from their fund supermarket, such as the ability to trade shares, or even a pension product within which to invest. But, what intrigues me is the knock-on effect that Vanguard’s presence in this market will have on the rest of the competition, the result of which can only be good news for all investors.

For example, when Vanguard landed on our shores back in 2009, it sparked a price war in the passive investment market.

Today, the likes of Legal & General, HSBC and Blackrock have aggressively cut their charges or launched new products to compete. Now, you’ll be hard-pushed to find passive funds tracking developed equity markets charging more than 20 basis points (or 20p in every £100 you invest) – a win-win for all investors, no matter which manager you choose.

Passive investing has been on the upward march over the past few years, but still has some way to go before it becomes the dominant choice for investors, as it is in the US.

But its rise hasn’t gone unnoticed, and fund supermarkets have been adapting their services to accommodate the increase in their popularity – adding tracker funds to their ‘best buy’ lists, for example, or using them more often in the portfolio-building guidance they offer.

Could the next step be a chop in platform fees to more closely compete with Vanguard? I hope so. Not because I think all investors are being ripped off – although clearly the FCA has found evidence that some are – but because it would indicate that investment firms are starting to act more competitively.

When that happens, the better companies and their customers will win. And at Which?, we like it when consumers win.

Gareth Shaw is head of Which? Money Online