The Protection of Retail Clients through the Benchmarking of Costs and Performance

Benchmarking has recently emerged as a new regulatory approach in EU retail investor protection. Growing concerns suggest that packaged retail investment products—such as units of collective investment schemes and unit-linked insurance products—may fail to deliver fair value relative to their costs and performance. Building on developments in the insurance sector, where supervisory authorities have already experimented with similar tools, the European Commission in 2023 proposed the introduction of ‘Value for Money’ (VfM) benchmarks. These benchmarks are intended to transform structured cost and performance data into regulatory yardsticks capable of guiding both industry practices and supervisory oversight. Although it remains uncertain whether the proposal will ultimately succeed, the core idea—originally conceived under the Retail Investment Strategy (RIS)—is likely to retain a prominent role within the broader Savings and Investments Union agenda, where strengthening retail investor participation in capital markets through enhanced protection and trust remains a key objective.

In a recent paper, we examine the Commission’s strategy and critically evaluate the strengths and weaknesses of this new framework. We argue that focusing solely on the costs of designing investment products—while leaving aside distribution costs—results in an incomplete assessment of value. We question whether, given the current scope of available data, such benchmarks can effectively fulfil their intended purpose. We further consider whether VfM benchmarks can effectively capture distribution, or whether the inherent limits in measuring distribution-related value may constrain what they can realistically deliver—thereby making lighter-touch regulatory tools worth considering.

To substantiate these arguments, we draw on recent ESMA evidence, which highlights that distribution costs represent a substantial share of total investment costs and materially affect retail investors’ net returns. Moreover, traditional intermediated channels—namely, credit institutions and investment firms—continue to dominate retail distribution and are consistently associated with higher distribution costs than digital and execution-only channels such as neo-brokers. A comprehensive assessment of investment costs cannot overlook detailed information on distribution. Limiting the concept of VfM to product-level metrics, without adequately considering the distribution model adopted, is both conceptually and methodologically incomplete. Given the central role of advisory channels in Europe, we maintain that assessing VfM requires evaluating not only the characteristics of the product, but also the capacity of intermediaries to create value through their service.

We then turn to the assessment of financial services quality, particularly financial advice. Drawing on the literature characterising such services as credence goods, we highlight that financial advisors possess superior knowledge regarding the alignment between product characteristics and clients’ needs. Because the quality of advice is embedded in the specific client-product relationship, the added value of the service relative to its cost cannot be easily assessed, even ex post. At the same time, advisors are exposed to misaligned incentives—such as commission-based remuneration—which may induce them to exploit their informational advantage and prioritise their own interests. This may generate different forms of market failure: underprovision, when the service delivered is inadequate; overprovision, when a simple need is met with an unnecessarily complex and costly solution; and overcharging, when the client pays for a level of service that is not actually delivered.

Finally, we draw the policy implications. We suggest that regulatory strategies may more effectively target the structural sources of market failure rather than relying exclusively on benchmarking tools, where services’ quality cannot be fully captured through cost-performance metrics.

The first structural factor is asymmetric information. In this respect, we consider a range of policy instruments that may operate as simplified alternatives to VfM benchmarks, offering less burdensome ways to assess the added value of advisory services than extensive reporting requirements. These include reputation-based mechanisms, such as updated datasets on customer complaints or reported misconduct, as well as client feedback and rating systems. Certification mechanisms may also function as signals of a minimum level of professional competence. However, their effectiveness depends on standardisation and public oversight, which appear necessary to ensure trust in certification systems.

The second structural factor concerns misaligned incentives. In this area, the limits of regulation through benchmarks become even more apparent, as such instruments cannot fully prevent the relevant market failures. Benchmarking may mitigate underprovision insofar as it holds intermediaries liable for recommending products that deliver insufficient value relative to their costs. However, it does not directly address overprovision or overcharging, since these relate to the quality of the advisory service within the specific client–product relationship. We therefore argue that regulation should address more directly the incentive structures shaping advisory behaviour. In this context, we highlight the limits of the current disclosure framework on inducements, which appear insufficient to ensure genuinely informed consumer choice. Although the Commission’s initial proposal envisaged the introduction of a ban on inducements, current trilogue negotiations do not point towards such a solution. We thus suggest investing in more robust experimental approaches to disclosure design, making the structure of costs and charges’ information more salient and practically usable for retail investors.

We therefore conclude that prescriptive regulations on charges, such as costs and performance benchmarks, might not eliminate the underlying factors driving costs in these different markets. By contrast, transparency—coupled with regulations that provide the space for competition not only on costs but also in areas such as level of services and performance—offers a more effective way to allow the market to continue to develop high-quality and cost-efficient opportunities for EU retail investors.

The authors’ paper can be found here. 

Barbara Alemanni at Professor of Financial Markets and Institutions at the University of Genoa and Affiliate Professor of Banking and Insurance at SDA Bocconi School of Management.

Michele Siri at Professor of Corporate Law and Financial Markets Regulation at the University of Genoa.