Two new campaigns to bring greater transparency to the murky world of investment fund fees have recently kicked off, but charges should be levied in a way that’s fairer for investors.
Investing your money has become an expensive business over the past two decades, as the charges passed on by fund managers have slowly but steadily continued to rise.
Today, it’s common for investment funds to charge their investors over 2% a year – and, in most cases, not all of these charges are even disclosed in statements or in the fund literature.
Although investors are not so worried about how much they’re paying in fees when their investments are doing well, few fund managers can deliver good returns every single year. And when your fund hits a rocky patch of performance, the bad news is that you’ll be feeling the pinch much more than your fund manager will.
It’s win-win for managers
If you invest £10,000 in a fund charging 2% a year, for example, your manager will get paid roughly £210 if he grows your investment by 5% to £10,500, so you only receive £10,290.
However, if the manager loses your money, reducing your investment to £9,500, he’ll still collect about £190 in charges – a £20 loss in earnings for him, but leaving £9,310 for you.
Although high fund charges cost investors billions of pounds each year, it’s a problem that has proved difficult to get on the agenda of regulators or policymakers. But over the past few months there’s been a growing clamour around the issue, from prominent politicians as well as parts of the fund management industry itself.
Move for more transparency
At the end of January, Fidelity Worldwide Investment, one of the UK’s largest fund management groups, announced plans to start disclosing all its fees to investors. It accused its competitors of ‘Ryanair pricing’ and called on them to join it in becoming truly transparent.
The very next day, Alan Miller, once the chief investment officer at the now defunct New Star Asset Management, launched his own campaign for transparency. He called on fund managers to disclose all fees and charges and also to tell investors exactly where their money is invested.
But while transparency is an important first step, it won’t deal with the bigger problem that the current charging structures do not align the interests of fund managers and investors.
Is there a better way?
When fund managers invest the money of businesses and pension funds, it’s not uncommon for the client to be charged a very low administration fee. This is only topped up by a performance fee if the fund manager outperforms his benchmark by a healthy margin.
So, when the fund performs well, the manager and client can share in the profits, while the manager will only take a small fee to cover some of his costs when he performs poorly.
Although performance fees are not unheard of in the world of private investment, they’re often in addition to, rather than in place of, the regular high charges. Plus, the level at which the manager starts to receive a performance fee is often far too low.
Now that there’s real momentum behind more transparency on charges, it’s time for fund managers to find ways of making their fees fair.