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IMA: Irresponsible scaremongering on fund fees, yet again

I groaned inwardly over breakfast this Sunday when I read the front page headline in the normally excellent Observer. Yet another story about how fund managers are taking huge fees which are destroying the value of our long term savings. Yet more irresponsible scaremongering by the story’s promoters.

Some of the assertions in this particular story were laughable. One claimed, for example, that charges are costing pension funds £67 billion a year; yet the investment management industry’s total revenues from all clients was in fact £11 billion in 2010. Another claimed that management fees for pensions are 1.5 per cent a year, as in the retail market, when in fact the average management fee across all business (including pension funds) is just 0.3 per cent.

Most corrosive however is the constant refrain about “hidden charges”. The narrative goes like this: the manager will tell you what explicit charges are levied, but there are others on top which you aren’t told about, and then of course there is all the money that is creamed off in fees for trading the underlying stocks. The first is easy to deal with: the “other charges” (which go not to the manager, but to the providers of other services, such as the registrar, trustee and auditor) are included in the “total expense ratio”. This is disclosed up front to investors – as is required under European law.

But what about those hidden trading costs? Well, they are not hidden: they have to be disclosed every year in the fund accounts. They represent the cost of investing, just as you or I would face if we invested our money directly. As such, the revenue does not go to the manager, but to brokers which are completely separate from the fund manager. Indeed the latter has a duty to obtain the best deal for the client. Of course, the biggest winner, at least for trades in UK equities, is the Government through its 0.5 per cent stamp duty charge.

But there is an easy way to resolve this argument. Funds publish their prices every day, so it is possible to measure the returns to investors very accurately. If these “hidden charges” really were hitting the investor hard, then you would see it in the average net return. For example, if the TER is 1.75 per cent and the fund underperforms the relevant stock market index by 2.75 per cent a year, then the combined effect of investment decisions and the associated costs is costing investors 1 per cent a year.

Well, we did those calculations a couple of years ago. The results are in this paper. They show no sign of investors losing out from “hidden charges”. Indeed, these numbers happened to show that trading had a net positive effect for investors, with the gains resulting from investment decisions comfortably outweighing the associated costs.

I called these stories irresponsible scaremongering. Those are strong words, but justified. It is scaremongering because it puts misleading figures into the public domain. And it is irresponsible because it is telling people they should not be saving for their future, when the responsible advice is that they should.

Richard Saunders is chief executive at the Investment Management Association


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. Excellent article, The Indusrty needs more people like Richard.

  2. Thanks for the article Richard. Mercifully most people neither read or remember this nonsense and it will already be used as chip paper. My feeling is that if the investment world shouldn’t earn what it earns, fine, do it yourself and we will invest our own money. Oddly enough we never come across clients willing to do that so nothing much will end up changing. It does make you wonder how financial journalists get away with writing this codswallop.

  3. Nigel Barker-Smith 20th December 2011 at 3:55 pm

    Yes excellent article, bringing further awareness to the greed and waste that most of the IM industry brings to society.

    Whilst Mr Saunders is admirably performing his duties to his paymasters, the RETAIL investor needs to be educated of the true cost of investing. Whilst he explains the various costs it doesn’t mean that they are justified.

    Technology over the last 30 years should have reduced fund management costs not increased them.

  4. Here here I whole heartedly agree with you Richard, and wouldlike to be kept up to date with your views on RDR etc.
    Will common sense prevail alas I think not maybe when and if they regulate the press they seperate into 2 main topics fact and fiction would be a good starting point.

  5. 0.3%? Really? As trail commission alone is typically 0.5%, that’s way beyond hard to believe.

    As for active trading beating a more passive approach, I’m afraid that I side with Graham and Bernstein on that one.

    The IM industry needs to sharpen their pencils and stop taking such a huge chunk of people’s pensions, and as they won’t do this willingly, it’s going to have to be via legislation.

    But what do I care: I started (passively!) managing my own investments nearly a decade ago, and it was the best thing I ever did.

  6. Well said, if they spent more time investigating the scandel of some of the banking products and the charges they would earn more respect.

  7. So the average charge is 30 bps is it? Bet IMA had to trawl around, maybe using institutional trackers in the mix to invent this ludicrously low figure.

    It is reckoned that the average multi manager fund TER is around 200 bps. Add in another 100-150 bps for the expenses not included in the ‘total expense ratio’ and that is at least 300 bps, if not 350+. Then put this MM fund in a pension wrapper, adding even more bps. Then look at inflation.

    Anyway see the problem here? No, Ok, I’ll spell it out. real returns are eaten away by inflation and charges, so that a real rate of return is probably negative. Add in that most active managers don’t even beat their peer group index (which has ‘survivorship bias’) and what you have is a recipe for wealth destruction.

    A spoof column in one of the investing magazines joked that it is the job of the financial services industry to convert a client’s wealth into the IFAs/fund managers/pension managers wealth. Maybe this is actually not a joke?

  8. Is it not true that the cost of an active fund to a UK investor is amongst the highest in the world, and that in the USA it is a lot cheaper?

  9. Tim Harrop-Griffiths 21st December 2011 at 8:34 am

    Richard, where are these funds with an average charge of 0.3% per annum?

    Please, please don’t come back and tell us that this is the actual management fee and that the rest of the AMC is made up of other costs becuase my clients aren’t interested.

    They want to know how much is being creamed off the top by so called proffessionals who are constatly failing them but never, it seems, failing themselves.

  10. Tim Harrop-Griffiths 23rd December 2011 at 8:52 am

    Still no word from Richard on where these 0.3% per annum funds are hiding – speaks for itself!

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