If there’s one thing that annoys people who invest, it’s finding out that they have to pay unexpected charges (I know from the emails I’ve received!). For years the investment industry has been pretty opaque about how much they charge and, although it’s improved in the last few years, it’s still almost impossible to find out all the charges upfront.
What’s the issue?
If you invest in a fund, take out a pension or another investment product, you’ll have to pay charges. The level of charges can vary according to how you buy (whether you get advice or go direct, for example) and the investment fund, company or pension provider you buy from. But it can be very difficult for investors to know what they’ll be paying in advance.
The True and Fair campaign, started by Gina Miller, co-founder of SCM Private, says that investment companies should be transparent and open about the fees they charge. “Anyone investing has the right to know how much it will cost before they invest their money and not after. If something is in the small print but not upfront, it’s a hidden charge.” The campaign wants financial products to carry a label that will spell out all the costs involved.
SAVVY TIP: At the moment the ‘ongoing charges figure’ or sometimes the ‘total expense ratio’ is used to spell out the costs of investing, but the problem is that these don’t include all the costs involved. Often the costs headlined in adverts are only annual management charges, which can be much lower than the overall costs.
Why costs aren’t spelled out
The investment industry doesn’t have a great track record when it comes to being upfront about the costs of investing (and that’s being kind to them). Although some companies are more transparent than others, on the whole they’ve had to be pushed into giving consumers more information, either by the regulator or by consumer and/or media pressure.
Gina Miller believes there are several reasons why the investment industry isn’t more transparent.
1. There’s a concern that people will be put off investing. Some investment firms appear to be worried that if they tell people what it costs them to invest, it will put them off. Gina Miller believes that while some may be put off, this shouldn’t be a reason not to be open about charges. “Investing may not be right for some people, but that shouldn’t stop investment companies from telling them the true costs.”
2. Some companies may see their profit margins fall. Gina Miller believes this would be a good thing. “Over 70% of companies have ended up with the same charges so it’s almost like a cartel. Transparency isn’t the same as low costs but I think it would bring some costs down.”
3. Companies already do what they need to do to comply with regulations. Gina Miller believes the industry should be taking the lead on transparency. “We should be doing more to repair our reputation among consumers.”
Transparency of holdings
The ‘True and Fair’ campaign also wants investment management companies to list their holdings (which means the companies whose shares they’ve bought for a particular fund) and says there would be two major benefits.
– Investors would be able to see if they were taking on too much risk. Some funds in the same category take on much more risk than others. If an investment management company had to list every business/company a particular fund invested in, consumers would know exactly where their money went.
SAVVY TIP: Investment managers wouldn’t be forced to reveal their entire investment holding in real time, instead they may be able to do this with a 30 or 60 day time lag. This would mean that you’d be able to find out exactly what the fund invested in 30 or 60 days ago (which currently happens in the United States).
– Fund managers may be under more pressure to justify their fees. Currently, many funds are ‘actively managed’ which means that a fund manager, or team, decides which companies to invest in and which shares to sell. ‘Tracker’ or ‘passive’ funds are much cheaper because they tend to buy share that make up a stock market index, such as the FTSE 100 or FTSE All Share. Gina Miller says that too many funds that sell themselves as ‘actively managed’ are actually little more than closet trackers. “There are some inexperienced fund managers who end up buying the shares in an index; so you pay active management fees but end up with a fund that resembles a tracker.”
What does the industry have to say?
Some fund management companies have openly supported the campaign, but the Investment Management Association, the trade body, is more cautious. Chief Executive Richard Saunders says that EU regulations set out how – and which – charges have to be disclosed. Net performance is the most reliable measure of the returns investors receive from a fund, after all costs and charges are taken into account and added: “Analysis of net performance shows that trading costs have no overall material impact on investors’ net returns. It is a myth that undisclosed charges are costing investors billions a year.”
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