Why Investment Fees Are Not What They Seem

When you buy and sell anything there is a cost and as the consumer you have a basic right to know what that cost is. But not in the world of investing, where as much as 50 – 85% of fees and mystifying layers of charges are hidden from savers.

SCM has calculated that just one hidden element, transaction costs for actively managed UK domiciled funds, are currently running at c. 0.38% pa or £1.75 billion pa*. SCM recognises that this varies from fund to fund according to their individual portfolio turnover rate (PTR), which is how often a fund manager buys and sells holdings in his / her fund, as well as the cost of the particular assets they specialise in. For example, funds investing in less liquid securities e.g. emerging market stocks or smaller company shares, are likely to result in far greater transaction related costs due to much higher spreads (the difference between the buying and selling price). But the fact that the average UK fund is not transparent or adding these costs to their published investment fees total or TER (Total Expense Ratio) is a travesty bordering on deceit.

It is SCM’s view that the industry regulator, the FCA, should act urgently to mandate that all funds show, in a format that is ‘fair, clear and not misleading’, 100% of all costs, including transaction costs. This would show investors that the ‘true’ charge is c. 0.45% more than the typical 0.85% pa headline charge of many equity funds.

In May 2013 we launched www.trueandfaircalculator.com , a free online calculator which enables investors to see exactly how much they are paying, including transaction costs, platform and advice charges, in one simple Total Cost of Investing number. We know that fund managers have refused to give investors the necessary cost information to use the Calculator, so the True and Fair Calculator site hosts a template and full assumptions document that any investor can download and send to their manager or adviser and demand to know all the fees and charges at all levels.

In any other industry, hiding such a cost would be illegal. It is shameful that neither the industry, regulator, nor government, have ever properly addressed this widespread anti-consumer practice, especially as the regulator’s own research, as long ago as 2000, found that 50% of overall fund costs were hidden**.

[*] Calculated as 64.7%pa/15.3%pa * 0.09% pa * £524,266m * 87.6% = £1,747m pa

[**] The Price of Retail Investing in the UK, by Kevin R. James, London School of Economics; February 2000. Financial Services Authority Occasional Paper 6.