Are structured products better value than active funds?

Although the average structured product is significantly cheaper than investing in an actively-managed fund, many investors mistakenly believe the opposite and do not challenge the cost of investment.

According to Ben Murison, co-founder of structured product platform SPGO, the all-in cost for a typical structured product is around 0.6% per year, compared with 3% for the average actively-managed fund.

While the UK is largely a fund-led market, funds have managed to charge relatively high costs while still successfully accruing assets, especially in environments where they significantly outperform the relevant benchmark.

However, volatile markets following the credit crisis of 2008 have seen the performance of many types of active funds plummet, while they still charge investors high fees.

Glossing over costs

Murison said the UK fund management industry has ‘done a fantastic job of getting people to gloss over the cost of investing into their expensive products.’

He explained the average structured product, which has a life of around five years, is typically created by a bank with a charge of around 3% as a one-off upfront fee. Over five years, this works out as 0.6% interest a year. In terms of annual management charges, auditor’s fees, and the trading costs associated with running a portfolio, these are typically zero in the case of a structured product.

In comparison, the average all-in cost for someone who invests directly, rather than via an adviser, in an actively managed fund is at least 3% a year. This figure includes the annual management charge, which in part is the cost of running the money, as well as auditor’s fees, actual trading costs incurred on running the underlying portfolio and any additional charges an investor could incur from their wrap platform.

Murison also argued that structured products are more attractive than typical passive exchange traded funds (ETF) in terms of cost. If an ETF has a total expense ratio (TER) of around 0.4% per year and a platform charges around 0.35% a year, this would mean the ETF has a total cost of 0.75% per annum, above the average structured product’s 0.6%.

He said: ‘Structured products clearly are cost efficient investments when compared to funds, sometimes by an order of magnitude.’