PFS conference: Former Credit Suisse chief attacks fund industry
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Former chief executive of Credit Suisse Asset Management UK David Norman has hit out at the charges levied by the fund management industry, claiming client money is often better off in a building society.
Speaking at the Personal Finance Society annual conference in London yesterday, Norman said fund managers make a lot of profit, but bring little benefit to their customers.
He said: “It is very simple. You start with ₤100m of assets under management, the market goes up 10 per cent and you add 1 per cent of extra performance. So you charge 1.5 per cent on ₤111m worth of assets for generating ₤1m of added value. So that’s ₤1.6m of fees for ₤1m of added value. That’s a pretty good business to be in.
“But it gets better because next year the market goes down. You take your ₤111m and of course you have to take your fees from last year off. The market goes down by 10 per cent and unfortunately, because past performance is not a guide to future, you add -1 per cent of value. For which you charge 1.5 per cent. Ie ₤1.46m. In total you have generated ₤3.1m of revenue as a fund manager for destroying ₤4m of customer value.”
Norman said fund management companies often try to conceal the real costs of their business models.
He said: “Nobody actually knows the cost of running an asset management business. It comes to about 3.7 per cent per annum when you add up all the cost and the wrap together. With a fund of fund it is a little bit more.
“Four per cent per annum for investing in the equity market and the equity risk premium is 4 per cent. You are better off in a building society. The good news is the regulator is only looking at the 50 basis points of trail, so while this is going on they are just looking in the wrong direction.”
Norman warned advisers to get as much information from the fund managers they use as possible.
He said: “Demand transparency. Demand your asset manager tells you the annual management charge, the total expense ratio and the transaction costs and make sure you do good due diligence. Make sure you understand what your discretionary manager is investing in, what the costs are, what the benchmark really is and get them to tell you what value they really added.”
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Readers' comments (2)
Bob Donaldson | 26 Nov 2009 10:20 am
Whilst what is said is fact, you also have to ask the question is the client better off by investing in that particular fund rather than not, and in many cases they are.
Pressure needs to be put on fund managers to reduce charges and perhaps the use of platforms with access to ETFs etc might do this.
However, as we have all seen from the banking debacle, the city seems to protect itself and therefore nothing is likely to happen quickly.
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Anonymous | 3 Dec 2009 12:01 pm
Though the adviser is being punished now in the long term it will be the fund groups as new entrants like Tescos & ETFs etc will see to that. If you then throw into the pot that Asset Allocation accounts for 90% of all performance and with more and more Advisers demanding active management the easy days with feet up in the Ivory Tower saying "we beat the benchmark" are coming to an end. So Advisers don't worry fund groups will get their come uppance!
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