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The hidden truth

Advisers have backed calls for total investment costs, including admin and dealing costs, to be included in fund factsheets.

Last week, asset managers SCM Private and Fidelity Worldwide Investment called for an industry standard for presenting investment charges after SCM claimed investors are hit with over £18.5bn of “hidden” dealing costs each year.

SCM, which announced plans to launch a new code of conduct to increase transparency on charges, wants fund factsheets to include annual management charges, custody, legal and admin costs, dealing costs and the cost of advice and distribution, including platform administration charges.

The firm wants the total provider cost to be listed separately, in addition to the total cost of investment via a specific sales channel, including any platform admin or adviser fees. It says this will provide a clear breakdown of costs and fees, which will enable consumers to compare investment products and providers on a like-for-like basis.

SCM Private leader Alan Miller says: “There should be a template for what it costs to invest in assets. The headline number of the total cost of investment should be on the fund factsheet.”

Fidelity is calling for fund managers to publish a full breakdown of the total annual cost of owning a fund calculated as a percentage and in monetary terms for a £10,000 investment.

It says this information should be “prominent and accessible” to investors and advisers.

Investment Management Association managing director Richard Saunders warns that the contents of fund factsheets are agreed at a European level and that any move to force UK firms to disclose additional information could harm their competitiveness.

He says all charges, including dealing costs, are included in annual reports and accounts although he admits most investors do not read the documents. He says: “I think there is a good case for making those documents much more prominently available to investors.”

Premier Wealth Management managing director Adrian Shandley says it is difficult for fund managers to quote total costs accurately because some, such as dealing costs, are often backward-looking but managers should provide an estimate. He says: “I can see the managers’ point of view but the total cost to investors should be estimated and included in fund factsheets.”

Bestinvest senior investment adviser Adrian Lowcock says: “There should be a headline figure outlining the total cost of investment and this should be broken down to mid-level on the factsheet, with a complete breakdown online.”

Values to Vision Financial Planning director Nick Lincoln says: “The total annual cost to investors should be on the fund factsheet and should replace the annual management charge. There does not need to be a complete breakdown on the factsheet because the most important thing to a mainstream retail investor is how much they are paying.”

SCM Private is calling for a code of conduct for fund managers that would require them to provide a breakdown of total fund costs on factsheets. It says this should include:

  • Annual management charge
  • Custody and administration charges
  • Performance charge – based on 12 months’ disclosed performance fees or the average of up to the past three years if data is available
  • Dealing costs – calculated as portfolio turnover rate multiplied by estimated full cost of buying and selling the underlying assets
  • Any other costs, for example, the costs of underlying funds if it is a fund of funds
  • Less any other recurring revenues such as money earned from lending out shareholdings to other institutions

SCM says this should give the total provider cost. It says any discounts for buying via a fund platform or broker should then be subtracted and any platform fees or adviser fees added to give the total cost of investment via any sales channel

Fidelity wants a standardised system to display the break-down of investor charges. It says this should include the typical costs of an actively managed fund, a low-cost active fund and an index tracker fund expressed in percentage and monetary terms for a £10,000 investment. It gives the following example:

Investment management charge
0.75% (£75 a year or £6.25 a month)
0.40% (£40 a year or £3.33 a month)
0.1% (£10 a year or 83p a month)

Other service and administration charges (such as legal and custody)
0.14% (£14 a year or £1.17 a month)
0.2% (£20 a year or £1.67 a month)
0.2% (£20 a year or £1.67 a month)

Cost of advice or distribution
0.5% (£50 a year or £4.17 a month)
0.5% (£50 a year or £4.17 a month)

Platform administration charge
0.25% (£25 a year or £2.08 a month)
0.10% (£10 a year or 83p a month)

Stockmarket dealing costs and Government stamp duty
0.36% (£36 a year or £3 a month)
0.25% (£25 a year or £2.08 a month)
0.09% (£9 a year or 75p a month)

Total annual cost of owning a fund
(based on investment of £10,000)
2.00% (£200 a year or £16.67 a month)
1.45% (£145 a year or £12.08 a month)
0.39% (£39 a year or £3.25 a month)


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