Fund groups losing their marbles
Fund firms’ bloated charges are reflected in their lavish office floors
I am often in awe of some of the wonderful buildings in the City which investment and insurance companies call home. The marble floors, the enormous front desks, right through to the variety of soaps in the restrooms.
But am I getting value for money? More important, is my client getting value for money? Are they being treated fairly while these institutions generate vast profits?
Activities such as mergers and acquisitions are major contributors to investment management profits but so are dealing charges. These are hidden and bloated costs that erode client funds and the ability of advisers to charge their fees without making the investment uncompetitive.
Dealing charges were last highlighted by the FSA over 10 years ago. It stated if a fund manager turned over 100 per cent of a fund, this would on average add 1.5 per cent a year to the costs.
Today, it is more likely to be around 1 per cent for the average UK equity fund, with some turning over considerably more. Performance does not merit these eye-watering charges, with the bulk of fund managers either fooled by randomness or running funds so huge they end up closet index trackers underperforming their index due to high running costs.
Many just disclose an annual charge - a useless figure often misinterpreted by investors. If we are lucky, we get to see the charge for additional expenses covering the fund’s legal and admin costs. The resulting total expense ratio is merely a voluntary disclosure, yet it is mandatory in the US.
But this is not even half the story in some highly turned- over funds. Banks will be happy to continue peddling these AMC-tagged zombie funds that trail their benchmarks but this should be the last call for IFAs to wake up. Curiously, with IFA charges under a microscope, hidden dealing charges remain under the radar.
Nonetheless, cutting dealing costs has recently become easier. Vanguard and others allow us to track markets passively at little cost and for those who prefer exposure to actively managed stocks, the Praemium platform nets trades and aggregates dealing charges very efficiently.
The bumbling RDR has presented the opportunity for all IFAs to look at our costs, how much fund managers are taking, how much we charge and how much the client is paying.
It is about time the pendulum of pricing power swung back to the advisers and their clients. There is no need for hidden trading costs that quietly install more marble in City buildings. We need the same transparency for those charges as for our own fees and we need to start putting some marble on our clients’ floors and maybe even some on our own floors too.
Mel Kenny is a chartered financial planner at Radcliffe & Newlands