ETF saving plan model under threat by inducement ban, platforms warn

Retail investors could incur higher fees for investing with online platforms

Theo Andrew

ETFs graph

The viability of the low-cost popular ETF savings plan model could be under threat by the European Commission’s proposed ban on inducements, digital platforms have warned.

Speaking to ETF Stream, Dirk Urmoneit, chief strategy officer at Scalable Capital, said its zero-fee ETF savings plan offering would become a “loss-making” business following the ban, unless it introduced a fee for retail investors.

It comes after the European Commission published its Retail Investment Strategy in May, which included a ban on inducements for execution-only sales – where no financial advice is provided – to ensure financial advice is aligned with investors' best interests.

However, the move would directly impact online investment platforms’ business models that are paid fees by asset managers for marketing their products.

“[Investors] do not have to pay an additional commission for us to execute ETF savings plans for them, it is funded through these inducement payments we receive from product manufacturers to promote their products,” Urmoneit said.

“If Scalable kept the price at zero to invest in our savings plan execution, there is no way of us monetising anything and it becomes a loss-making business for us.”

The Retail Investment Strategy saw the European Commission scale back its original proposal to introduce a blanket ban on kickbacks, where advisers receive payment from asset managers for pushing their products.

European Commissioner for financial services, financial stability and Capital Markets Union Mairead McGuinness had previously said inducements actively steer retail investors away from low-cost products such as ETFs and into more costly and unsuitable investment products, with distributors focusing on pushing higher-margin products.

Under the practice, investors are charged a fee on top of the fund’s total expense ratio (TER) which is then handed over to the distributor for onboarding the investor.

However, inducements made on the ETF saving plans differ, with asset managers paying a small fee to online platforms for marketing their products, which is taken out of the ETF’s TER.

Scalable Capital receives up to €2.60 from third parties in connection with transactions in shares of exchange-traded products (ETPs), according to its terms and conditions.

“We are obligated to use this money to the benefit of investors which we do through low prices. This is driving investors to set up savings plans which would otherwise not make sense with higher commissions,” he added.

“One of the drivers [of the ETF savings plans] is to allow investors to save for example €10 a month, but if you are paying €6 in commission then it is obvious the entire setup does not make any sense.”

ETF saving plans continue to take Europe by storm, with 4.9 million investors contributing to the plans in 2022, up from 1.9 million in 2019 and three million in 2021, according to BlackRock data.

Investment platforms such as Trade Republic and Scalable Capital have built up a large client base by offering ETF saving plans, with the latter hitting one million ETF stock and saving plan savers in January.

Christian Hecker, CEO of Trade Republic, told ETF Stream: “We are confident that even after [a] ban, we will still have the most affordable offering for retail investors in Germany,”

The group did not state whether they were for or against the ban.


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