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Consumer Panel hits out at ‘unacceptable’ fund management costs

The FCA Consumer Panel has called for urgent reform of investment management charges, saying it is “unacceptable” that costs are not disclosed to consumers.

Research commissioned by the panel, published today, found that the full costs borne by investors are not known, with a number of costs not properly measured or declared.

It concluded that explicit costs charged to the customer, such as the annual management charge and the ongoing charge figure, are a poor guide to the full costs.

Consumer Panel chair Sue Lewis says: “The combination of poor disclosure, weak governance and multiple conflicts of interest means competition in the investment market is not working in the best interests of consumers.

“The problems our research has identified are long standing, and need fixing urgently.

“People are depending more and more on investment to deliver their long-term financial wellbeing, especially in the light of the recent pension reforms. It is completely unacceptable that consumers do not know what firms are charging them to manage money on their behalf, and cannot compare different offers.

“While we recognise the industry is working to improve disclosure, this does not go far enough.”

The panel suggests investment managers should be required to quote a single and comprehensive annual charge, including estimates of forward costs such as transaction charges.

All other costs, currently deducted by the investment manager directly from the fund, would be borne by the investment management firm.

The panel says this would enable consumers to compare different firms’ charges, and act as an incentive for firms to improve efficiency.

The panel also recommends investment managers should have a strengthened legal obligation to put the interests of their customers first. It argues the regulatory requirement to treat customers fairly does not tackle the multiple conflicts of interest in the investment industry.

The panel will host a roundtable with stakeholders early in the new year to discuss the findings of the research and suggested solutions.

The Investment Management Association says it has developed a measure which tells consumers in pounds and pence how much a unit in a fund grew over the course of a year and how much it cost.

IMA chief executive Daniel Godfrey says: “That is a backward-looking measure whereas what the Consumer Panel is talking about is a forward-looking measure.

“The criticism that consumers are unable to compare costs before investing is a valid one, and one the industry has tried to address. Where I would disagree is fund managers charging for transaction costs in advance, because at the beginning of the year a firm has no idea how much trading they are going to do. If you include it in the price then you create a conflict of interest.”

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. The costs are what the costs need to be. The alternative is that one can set up a direct share trading account and manage one’s own investment holdings rather than via collectives (good luck with that, I am sure that it will prove more expensive in many ways!).

    I can get a taxi or I can walk. Taxis are more expensive but probably quicker and safer; in addition, I don’t need to figure the route myself!

    We’ve been here before with stakeholder and charging levels were unsustainable then. Now they are even lower, but computerisation has helped this process. How much lower do they want it to be before the consumer outcomes are detrimentally affected?

  2. correlationstreet 17th November 2014 at 9:21 am

    Interesting analogy Steve between a taxi & walking, I assume mirroring asset managers vs DIY investing? The next analogy which is happening right now is UBER et al – there will be disruptive technologies within asset management very soon just like the old fashioned taxi business………..

  3. Money Guidance CIC 17th November 2014 at 9:49 am

    “Research commissioned by the panel, published today” – at what and at whose cost? This is old news that other organisations have been highlighting for years. All that the FSCP needed to do was refer to the extensive research already conducted by the likes of the True and Fair Campaign to demonstrate what is omitted from AMCs, TERs, OCFs, etc. It would have been a lot faster and cheaper.

  4. Christopher Petrie 17th November 2014 at 10:22 am

    But before I get into the taxi, I can ask how much the fare will be. And when I get out, that’s what the charge is. The driver doesn’t add another £5 for “hidden fees” which is exactly what fund managers currently do.

    The fund management industry needs to sharpen up, cut its costs (else the Passive space will take over a huge part of it) and be transparent in what it does charge. At present IFAs are almost at a loss to know what a recommended fund is actually charging its clients.

    I suspect the average active fund management charge will be falling from around 75bps to nearer 50bps over the coming years, something we should all welcome as the current rates are just too expensive, particularly in a low-inflation environment with squeezed nominal returns.

  5. May be advisers should declare the cost of regulation to clients rather than absorbing them

  6. When I invest for myself I have little regard to the funds costs; I tend to look at the strategy of the fund, the manager and the past performance.

    Although costs are important, the consumer panel and compliance put too much emphasis on them. Compliance dictates that for my clients have have to look at charges in some detail. Charges mount up and when coupled with the pathetic growth rates that we are allowed to project make some of the best funds look deeply unattractive. Therefore clients often get second best because that’s what the data suggests is best.

    Strangely though, my own, more expensive portfolio usually does better than the cheaper one that compliance dictates I recommend to my clients. Just saying.

  7. FCA we could charge you with the same unclear lack of transparency. Be careful what you push for FCA and consumer panels because the outcome is likely to be very different to what you imagine. You could also find an investment gap to add to the adviser gap!!!

    Its easy to sit and make judgement, if you push to hard what you will end up with is an investment gap. Just like RDR if you bush this the fund managers will have no choice than to introduce flat fees and full charging structures to EACH Individual investment. You might not like percentages but it does allow for a degree of cross subsidy, certainly at the lower end investments. This will lead to funds under £100K not being viable, It will also back fire on your rich friends in London as without the volume their charges will increase substantially as well.

    We all agree its not perfect, but even at 1.5% on a £10,000 investment, for the number of people employed, research undertaken, services provided, transactions undertaken who much clarity do you want for £150. Even at £100,000, £1,500 for the work undertaken is cheap. I also notice as usual there is no mention of the increased regulatory and PI risk taken with investments. Add this to the bottom line as well.

    I would imagine Sue Lewis hourly rate is more than £150 per hour ?

  8. They see their purpose as to scaremonger and instil distrust in financial services in the belief that it promotes their job and purpose. In doing so ignoring what the MPs want which to be is a serious delinquent act.

    Charges are displayed in a manner requested by the Regulator, if they don’t like it they need to talk amongst them selves to sort out how they want them displayed and not suggest the industry is not complying. Any fund managers not displaying their charges they can fine, how many have they fined? I can’t recall one off hand.

    They are becoming like FIFA. Especially on the pension illustrations trying to make out that charges are the main issue in the illustrations when they have repeatedly been informed investment performance is. To retaliate they reduced investment returns that could be quoted to a ridiculously low level and increased the assumptions on RPI to the point that they predict inflation will outstrip equities every year permanently. That’s never happened even for one year and is economically impossible. If a firm gave advice based on economic impossibilities it would fined and possibly struct off. Next we’ll know is Sepp Blatter being on the board.

  9. The writer of the Consumer Panels report was Dr Debbie Harrison, the same person who wrote the glowing report on Keydata’s life settlement plans BEFORE they collapsed which many advisers read, took note of and influenced their decision to recommend the product to consumers.
    She was listened to then and look what that cost, so why would ANYONE in their right minds listen to her now when she is so silent on Keydata?
    I pointed out to the FSCP that in my opinion until the Keydata debacle was resolved, her position on the FSCP was untenable, but they told me where to go on that one. Wonder why?

  10. I think the fact that funds use an archaic percentage charging structure is wrong; why should someone investing more pay more for exactly the same service, performance and product than others?!?

  11. Matthew, if your clients had to pay the actual costs in real terms on their funds invested, what amount do you think it would become viable for a client to invest. You could say good bye to many small to medium investments. It would make it only accessible to the wealthy.

    We know its not perfect, we know it works just like the UK tax system, that the top 20% pays 80% of the costs.

    So, the question we should all be asking is have the FCA and Consumer Councils understood this and if so, it means they are not looking after the main body of consumers (the 80%), but their wealth friends.

  12. @Matthew
    Convenience, simplicity, and to give access to smaller clients who would otherwise be disenfranchised.

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