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Ten years ago, the unit trust industry stood poised to rule UK financial services.

Its product was relatively cheap, flexible and simple and its main rival – the life industry – was being pummelled by regulators and the media.

To have won the day, unit trust companies needed only to compete hard and put the consumer interest to the fore.

Unfortunately, they have failed. Members of Autif now manage nearly £300bn. That is much more than they had a decade ago but their market share in relation to the life industry&#39s remains puny.

No doubt, most unit trust company bosses do not worry too much about this. They have made a fortune over the years by increasing their funds under management while maintaining their profit margins at around 30 per cent of revenue.

Why bother winning over the bulk of ordinary investors when they can make killing out of the four or five million they have already got?

If you don&#39t believe that the unit trust industry has got complacent, consider this. The average actively managed unit trust savings plan now has a significantly higher reduction in yield than the average 25-year unitised endowment policy. The unit trust levies disclosed charges of 1.9 per cent a year compared with 1.6 per cent for the endowment – a difference of about 20 per cent.

There is also the small matter of the unit trust sector understating its true charges. According to the FSA, when the average unit trust manager discloses total annual charges of 1.4 per cent, what he actually means to say is 2.7 per cent.

The difference is accounted for by the fund&#39s dealing fees – the cost of buying and selling shares on the stockmarket – and adds up to about £3bn a year for the sector.

No doubt, the chaps at Autif will start jumping up and down when they read this, claiming it is all terribly unfair. They will admit, if pushed, that actively managed unit trusts are now more expensive over 25 years than the most hated product ever to have stalked the earth but they will point out that the unit trust is more flexible.

Autif will also admit to its members hiding their dealing fees but will argue (correctly) that to do so is not against the rules and that the life industry does the same. It will also claim that the FSA has miscalculated and that the hidden fees do not add up to as much as 1.3 per cent a year on the average unit trust.

This last point is best taken with a pinch of salt because, so far as I understand it, Autif makes no attempt to include the lavish backhanders or “soft commission” its members receive from stockbrokers in its own calculations. What you are left with then is a nasty smell emanating from the unit trust sector.

It is the smell of complacency – the smell of an industry which could have been the cheapest and the most transparent but decided instead to turn to fat. So far, it has got away with it but the tide is about to turn.

While Autif&#39s members have all but ignored the idea of retail investment as a commodity that Virgin brought to the market, the life companies have been listening hard.

The result is that two or three giants like L&G are about to mop up. In place of endowments, they have started selling index-tracking unit trusts at just 0.5 per cent ayear and already have some £90bn under management in that single fund.

When stakeholder pensions come in next year, the entire pension market will go the same way, with firms such as L&G and the Pru already offering plans priced way below the 1 per cent maximum set by the Government.

For consumers, the results will be excellent. They will pay less and, because their money is held in trackers, their investment returns will improve dramatically.

And what of conventional unit trust companies which continue to promote the myth of active investment management while taking £1 of every £2 of growth achieved in charges? Well, they, I suspect, will be forever condemned to reflect on what might have been.


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