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 at the London Hilton Metropole last week, 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 is 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 off your fees from last year. 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, that is, £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: “It is important to understand what the end-to-end costs are for investors. 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.”