Among advanced economies, Spain is the country where investors pay the highest commissions in investment funds.
We paid approximately double. And I surely fell short. If we had participated in the commission reduction process that has occurred globally, we Spaniards would be saving more than 5.6 billion euros per year.
In Spain there are millions of people who invest in investment funds. An investment that, together, adds a heritage of 800,000 million euros. And where do you pay? an average annual management fee of 1.4% on said heritage. That is, 11.2 billion euros per year.
In Spain, an average annual management fee of 1.4% is paid. Outside of Spain that figure drops to 0.7%
Considering that Outside Spain that figure drops to 0.7% annuallyThat is, at half the 1.4% they currently pay, Spaniards could save 5.6 billion euros annually. In fact, as we will see below, they can already do it,
The magnitude of the savings is best perceived from a certain asset level. If we think, for example, of the portfolio of an investor who has 200,000 euros, if he is paying 1.4% on average annually, it means that he pays 2,800 euros per year. If you paid 0.7% you would save 1,400 euros. Every year. AND, The greater the assets, the greater the savings.
And why do we pay more than in most countries around us? Well, because there it has been allowed to expand investing in index funds and ETFs.
And since, for example, a variable income index fund has a commission of around 0.3% – compared to the 1.8% average that a traditional fund may have – it is easy to see what you can save. And ETFs, that is, exchange-traded funds, They are even cheaper.
Outside Spain, investment in index funds and ETFs has been allowed to expand.
Outside of Spain there are many greater competition between financial institutions. Furthermore, some of what are now the largest fund managers in the world realized that by lowering their commissions they were taking clients away from traditional fund managers.
On the contrary, In Spain there is an oligopoly of fund distributionthat is, banks, securities firms and non-independent financial advisors, who have preferred to adopt a defensive rather than competitive position. And they can do it precisely because there is an oligopoly.
Nor has the arrival of the automated advisors or roboadvisors, because, although they work with index funds, they require discretionary portfolio management, which has a cost (around 0.4%).
And also They charge a custody fee, Therefore, if you add the three fees (the index fund management fee, the index fund portfolio management fee, and the custody fee), the savings produced by using index funds disappear.
Outside of Spain there is much greater competition between financial entities
Furthermore, it is being paid a management fee for a management that does not existsince these automated advisors limit themselves to imitating the composition of the MSCI World global index or that of the S&P 500. To do this, it is better to buy an index fund to these indices, which are easy to find, and you save the portfolio management fee.
As for ETFs, that is, exchange-traded funds, which are third-generation investment funds, the panic of the distribution oligopoly has been absolute and that is why they have been used thoroughly to prevent its development. Including the curious coincidence that they do not have the tax advantages of traditional funds, which is a great barrier to entry.
It is clear that the wall has worked, but that does not mean that it does not have cracks. First, because you can buy indexed funds, even if the offer is small and, second, because you can buy traditional funds in their version of clean class.
They are the cheapest version of investment fund shares and have the enormous advantage that they allow you to invest in actively managed funds at the same price as in an index fund. And let’s not forget that there are 20% or 30% of funds that yes they beat the benchmark indicesso it should not be ruled out.
There are 20% or 30% of funds that do beat the benchmark indices
Obviously, the oligopoly has also put up barriers to entry for clean classes, requiring very high investments to be able to use them, since their commission is half that of the retail classes, including the custody commission. The other option is for the client to sign a portfolio management contractwith its corresponding commission. And it adds and continues.
But here too there is a crack in the wall. Some independent financial advisors offer – we offer – the possibility that clients can access clean classes even if their assets are small.
The oligopoly has also put up barriers to entry for clean classes, requiring very high investments to be able to use them
In banks and securities firms where, because they are accompanied by an independent financial advisor, the minimum investment is very low (around 30,000 euros of assets to invest).
And without the independent advisor taking a commission of any kind, since an independent advisor registered as such with the CNMV cannot charge commissions from third parties, only from the client for their advice. And normally the fee or subscription for advice is much cheaper than the cost of portfolio management.
In short, today, any Spanish investor who has more than 25,000 euros To invest you can access clean types of investment funds and pay 50% less commission than what you are currently paying.
This, combined with indexed funds that can be accessed directly, without having to sign a management contract, allows Spanish investors to have fund portfolios whose cost is around 0.7%: 0.40% clean class management fee plus 0.30% custody fee.
***Víctor Alvargonzález is a founding partner of the independent financial advisory company Nextep Finance.