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Call for ‘industry standard’ to protect investors from hidden charges

Hidden charges make it difficult for investors to compare funds. Now Fidelity is calling for a simple charging structure so the true cost is clear to all

Fidelity Worldwide Investment is calling on investment fund companies to adopt an industry standard breakdown of costs to help end hidden charges that can damage investors’ returns. The firm said inconsistent price comparisons did not help investors, and urged the industry to develop a universal approach to disclosing the total cost of investing in a fund.

Investors typically use the annual Total Expense Ratio (TER) to compare the cost of investment funds. This may include published fees such as a company’s standard annual management charge as well as various administration fees. But, deceptively, the TER excludes dealing commission, stamp duty and other portfolio turnover costs that can add considerably to investors’ annual charges, depending on how often a fund manager buys and sells shares within the portfolio. Investors only find out they are paying more in fees than they would have thought at the end of the year through their annual statement.

The average yearly TER on a £10,000 investment across all UK retail funds is 1.65% – £13.75 a month or £165 a year. But Fidelity said this rises to 2% when portfolio turnover costs are included – that’s £16.67 a month or £200 a year. For wealthier investors, a small percentage difference in fees can seriously add up.

Fidelity’s research mirrors an investigation by consumer rights group Which? in October 2011, which found that £258m of portfolio turnover costs was being hidden from consumers each year. It said a high level of portfolio trading can sometimes double the annual costs of holding investment funds.

Gary Shaughnessy, UK managing director at Fidelity, says: “We believe the charging structure on funds should be simple, easy to understand and not discriminate against smaller investors.

“We are seeing selective pricing start to emerge, which runs the risk of misleading investors about the real costs they are paying. Some companies are only presenting part of the picture and, crucially, they are failing to show the cost of advice or the cost of the platform without which investors would not be able to access the fund.

“There are a lot of headline figures being bandied about but they do little to help investors understand the true cost of investing, or to evaluate whether these costs are fair for the service they are receiving. What will really help is a transparent and standardised cost breakdown in pounds and pence.”

Alan and Gina Miller, co-founders of exchange traded fund specialist SCM Private, have been critical about the information available on charges, and have launched calling for greater transparency over charges and how managers invest clients’ cash.

SCM’s research indicates that only 19% of savers and investors know how much they are charged; while hidden costs across the entire UK savings and investment industry run at £18.5bn.

Alan Miller, who was chief investment officer at New Star Asset Management until 2007, says: “British consumers have, over many years, been comprehensively misled by the investment management industry in relation to transparency of charges and investments.

“Key issues are the multiplicity of hidden fees, lack of product transparency and the convoluted language which the investment management industry uses. The odds are stacked against consumers being able to make informed and competitive investment decisions.”

The asset management industry’s trade body, the Investment Management Association, argues that trading costs are readily available in fund literature, while investment fund regulation also requires their disclosure. Richard Saunders, chief executive of the IMA, says: “People need to save for the long term. They do not need to be scared off by false stories that they will be ripped off by the industry.”

For actively managed funds in the UK All Companies sector, the IMA said trading costs totalled 0.31% of funds’ average assets in 2009 (the latest figures available from the IMA). For tracker funds, transaction costs totalled 0.06%.

Saunders adds: “The IMA’s figures demonstrate clearly that so-called hidden charges which cost investors billions a year are a complete myth. If the accusation were true, it would show up in the net returns achieved by investors. But there is no sign of it. The accusations of hidden charges do not stand up.”

Gina Miller said SCM’s proposed code would provide 100% transparency by showing the whole range of fees, to be called the Total Cost of Investment (TCI). She also highlighted the call for improved transparency. “If managers were required to publish a full list of holdings once a quarter, investors would be able to see if the manager had done something odd or if a fund was straying too far from its stated approach.”

Patrick Connolly of IFA AWD Chase de Vere says: “It is a balancing act. While investors may want more transparency so they can see a full breakdown of fund holdings, the danger for a manager is that their best ideas are simply picked up and copied by others who don’t invest in the fund.”

He added that the investment industry often fails to make fund management charges clear and transparent: “Many investors believe that the total charges they pay on an investment fund are the initial charge and the annual management charge. However, the reality is that the TER can be much greater than the annual management charge.” © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds