According to the study, investors using the most expensive passive funds could see their returns significantly diminish over the long-term.
The stark difference in charges can leave investors in the priciest passive funds with a portfolio worth less than that of the cheaper option, even when funds deliver almost identical performance.
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AJ Bell found that after ten years, a portfolio in the most expensive UK tracker funds would be worth £1,800 less than the cheapest tracker with the same performance.
According to the investment platform’s calculations, an investor holding a mixed portfolio across seven of the main investment sectors across global equity markets could be almost £9,000 better off over ten years, based on a £100,000 investment.
The most expensive tracker funds are often at least 0.2% more expensive than the cheapest option, and in some cases can cost 0.5% or even 1% more than the lowest price alternative tracking the same region.
The most expensive trackers could have initially been priced with a fee covering investment, administration and any financial advice received, but many of the funds have now switched to investment platforms where investors could switch to cheaper fund, the firm said.
The current rules prevent investment platforms from notifying investors on possible cost savings on passive holdings in their portfolio, as it would be deemed financial advice.
The ongoing Advice Guidance Boundary Review is considering ways to improve the help customers receive, which AJ Bell said “could lead to better consumer outcomes”.
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AJ Bell’s head of investment analysis, Laith Khalaf, said: “It might come as a surprise, but not all tracker funds are created equal. There can be a big gulf in charges, and over time this can produce a seriously large dent in your nest egg if you happen to be invested in a higher cost tracker.
“With no chance of outperformance because they invest passively, the difference in returns between comparable tracker funds will be largely dictated by fees. It therefore makes sense for investors to seek to reduce costs where possible, and sometimes this means voting with your feet and transferring to a new provider.
“At the moment, platform providers can identify customers who hold higher cost tracker funds but cannot contact them to point this out as this could constitute personal financial advice. The regulator is currently reviewing the dividing line between advice and guidance, and this is an example of how relaxing the rules could help investors to make better, more informed decisions.”
