I got into a deep discussion with some fund distribution types last week about fees. They had a lot to say about the fees charged by some larger adviser groups and how they were in some cases (particularly in vertically integrated firms) really quite high.
I found this very interesting. The fund distributors worry about our fees and we worry about fund management groups’ fees. But somewhere in the middle of all this is the investing public desperately trying to work out what they are being charged and for what service as well as the value they receive for such costs.
After decades of regulation, perhaps we might have hoped to be a little further forward. Indeed, while my discussion was primarily about adviser fees, the same could very well be said for fund charges. All these costs add up for investors and, at times, this makes for true disclosure to clients incredibly problematic.
US investors have been able to see the true cost of holding funds for over a decade but the debate just rumbles on over this side of the pond. Back when he was head of the Investment Association, Daniel Godfrey had a go at shining some light on the subject, but we all know what those efforts brought him.
I still struggle to understand why most fund groups, large or small, seem to charge pretty much the same, despite the massive inflows we have seen over the years. Where are the economies of scale that can be found in virtually any other industry from larger players?
“US investors have been able to see the true cost of holding funds for a decade but the debate just rumbles on in the UK”
There is much talk among the fund groups of the value of “alpha” and why it is worth paying for. This is a view I also hold and is why we construct portfolios using passive as well as active funds.
However, I suspect the investing public – or the discerning investor, at least – is still suspicious of the fees charged for active funds. Every now and again another industry expert will pop up and decry this lack of transparency, equating it with a lack of trust. This kind of commentary is surely corrosive to active management.
Just as advisers have had to work hard to explain their costs and the value derived from using a professionally qualified, technically competent planner, perhaps it is time for some of those in active fund management to step forward and put a little momentum behind their style of investment. They obviously believe in it and there are some incredibly talented fund managers that consistently deliver excellent results.
Instead of closing ranks around charges and grumbling loudly about the asset flows heading into ETFs they should come out loudly and proudly about what they do for the benefit of their investors.
Linked to a real concerted effort to work on reducing fees, showing them in their actuality and entirety, and delivering on the economies of scale that must exist, maybe – just maybe – we would have the beginnings of a totally transparent advice and investment proposition.
Lee Robertson is chief executive at Investment Quorum