400 Basis Points for an Index Fund? Colombia to Expose High Fees

(Bloomberg) -- Colombia is planning to force pension fund managers to be more transparent about their costs, in a bid to bring down some of the world’s highest management fees.

A regulatory decree, which will be published this quarter, will oblige managers of so-called voluntary pension funds to publish clearer and more comprehensive information about the fees they charge clients, according to Felipe Lega, head of the Finance Ministry’s financial regulation unit.

“The disclosure of fees was probably not so clear or not so obvious to investors,” Lega said in an interview. “It is important that this disclosure is made from the first moment, before the client enters the fund.”

Tracking the world’s major stock indexes is getting cheaper all the time for U.S. and European investors. Managers including Fidelity Investments, Vanguard Group and Charles Schwab Corp. have slashed their fees on some passive funds to zero, or close to zero.

This revolution hasn’t reached Colombia yet, where savers can pay hedge-fund like fees for funds that overwhelmingly hold passive index trackers.

One option available to Colombian savers is the International Dollar Shares, which is run by Colombia’s largest pension provider Porvenir, and which largely invests in low-cost exchange traded funds.

Two thirds of its portfolio is in a single BlackRock fund that replicates the MSCI All Country World Index, while another 19% is in a State Street fund that tracks the S&P 500 index.

For this, Porvenir charges its clients as much as 4% per year in fees. The fees fall as the client’s balance increases, so someone with a balance between $6,500 and $26,000 would pay an annual management fee of 3.95%. The minimum fee of 1% per year would be charged for balances above $9 million.

Proteccion, Colombia’s second-largest pension fund manager, offers a U.S. share fund of which 96% is invested in two index funds tracking the S&P 500, while charging an annual fee of as much as 3%, which can drop to as low as 0.7% on balances that exceed $3 million.

The Colombian government doesn’t want to regulate the fees, just make it easier for clients to find out what they’re paying, Lega said. The decree will also force fund managers to make it clear whether an investment is actively or passively managed.

Colombians can save income tax on money they put into the voluntary pension funds. Many people use them as a general investment vehicle, rather than exclusively for retirement savings.

About 740,000 Colombians are affiliated with a voluntary pension fund, which between them have $6 billion of assets under management, according to the Colombian Association of Pension Fund Managers.

Andres Vasquez, Porvenir’s vice-president of sales said that management fees include the cost of hiring financial advisers, and responding to client inquiries. Porvenir plans to offer investments via digital platforms with lower costs, he said.

“We charge fees that are where the market is today. We are neither the cheapest nor the most expensive,” Vasquez said in a phone interview. “Today we charge 2% on average in annual fees.”

Proteccion’s Vice President of Client Experience, Sebastian Restrepo, said in an emailed reply to questions that while it has passive funds, which hold ETFs, it also has active management, where client fees pay for “a human team dedicated to finding and taking advantage of the different opportunities that are presented in the market”.

For U.S. funds, the asset-weighted average expense ratio has fallen every year since 2000, according to a report by Morningstar Inc. The asset-weighted average fee for passively managed funds fell to 0.15% in 2018 from 0.16% in 2017. The asset-weighted average fee for actively managed funds also fell, to 0.67% from 0.71%.

An investment of $100,000 in a fund that returned 7% per year would produce a gain of $661,226 over three decades. A 2% annual fee would cut this to $315,000, while a 4% fee would cut it to $123,692, according to SCM Direct’s True and Fair calculator tool.

Small markets such as Colombia tend to have higher fees than more developed ones such as the U.S. and the U.K., said Alan Miller, chief investment officer at London-based wealth manager SCM Direct, and a campaigner against hidden fees in the industry.

“The industry can take advantage of the fact that with a small number of players and if people don’t understand the fees charged and they don’t see it regularly it makes it easier for that small number of players to charge a much higher fee,” he said. “Three to four percent is very high and might be one of the highest in the world.”

A report by a government commission published last year recommended that long term savings should be promoted with tax incentives for savers who buy government bonds and stocks, rather than via voluntary pension funds.

Other countries in the region have also had controversies over fund fees. Chile’s President Sebastian Pinera is moving ahead with plans to increase competition among pension providers.

Chile’s pension fund managers charge annual fees on voluntary savings ranging from 0.16% to 0.95% with an average of 0.62% on assets under management, the nation’s pension supervisor reported on its website.

Argentina’s private pension funds were widely criticized for high fees and low returns, before the government of Cristina Fernandez de Kirchner nationalized them in 2008.

To contact the reporter on this story: Oscar Medina in Bogota at omedinacruz@bloomberg.net

To contact the editors responsible for this story: Andrea Jaramillo at ajaramillo1@bloomberg.net, Matthew Bristow, Oscar Medina

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