Almost half of European fund investors’ costs go to distribution, according to a new report by the European Securities and Markets Authority (ESMA), highlighting how traditional bank-led channels continue to dominate the European investment landscape.
In a pan-European review of the total cost of ownership for both UCITS and alternative investment funds (AIFs), ESMA found that distribution costs make up 48 percent of total UCITS expenses. These charges are driven by the central role of credit institutions and investment firms in fund distribution across most EU member states.
Funds sold through digital investment platforms and execution-only neo-brokers were found to be considerably cheaper, reflecting lower intermediation and a more transparent cost structure. ESMA pointed to a structural imbalance in Europe’s fund market, with banks still acting as gatekeepers to retail investors and keeping overall costs high.
Banks dominate retail access
The report found that 81 percent of retail investors in Europe access funds through advice-based channels. Banks account for 57 percent of retail fund distribution across the EU, far outpacing digital or independent advisory platforms.
The findings underline how, despite years of regulatory efforts to improve transparency, Europe’s fund industry remains largely dependent on advice-based, bank-centred networks.
ESMA finds that the total annual cost of investing 10,000 euros for one year in UCITS ranges from 50 euros for passive bond funds to 200 euros for actively managed equity funds.
ESMA finds that the total annual cost of investing 10,000 euros for one year in UCITS ranges from 50 euros for passive bond funds to 200 euros for actively managed equity funds. These examples correspond to total costs of between 0.5 and 2 percent of the invested amount. Distribution accounts for nearly half of these totals, making it the single largest cost component for investors.
The regulator also observed that maximum entry and exit fees disclosed in PRIIPs Key Information Documents often overstate the charges investors actually pay. It said cost reporting remains inconsistent across EU legislation, limiting the comparability of total costs.
Alternative funds costlier
For AIFs, ESMA found that the total annual cost of investing 10,000 euros ranges from 144 euros for broadly diversified funds to 280 euros for real estate funds. These figures correspond to average total cost ratios of between 1.4 and 2.8 percent.
Distribution costs for AIFs amount to 27 percent of total costs. Inducements for AIFs account for about 34 percent of ongoing charges, against 45 percent for UCITS, ESMA said. These differences reflect both the nature of the assets and the investor base. ESMA said that higher costs in AIFs often result from valuation, liquidity and operational requirements specific to private market strategies rather than inefficiency.
Inducements under scrutiny, again
The findings come as Brussels debates how to make capital markets more accessible to retail savers under its Retail Investment Strategy and the broader Savings and Investment Union agenda. ESMA’s data reinforces concerns that inducement-based distribution models, in which banks and advisers receive commissions from fund manufacturers, keep costs high and obscure true pricing for end investors.
While the European Commission’s latest proposals stopped short of banning inducements, ESMA’s findings could renew pressure for reform. The regulator highlights that inducements account for almost half of the ongoing costs borne by UCITS investors. Fund sales in the Netherlands and the United Kingdom already operate without inducements to third-party distributors, showing that a market can function effectively without such payments.