Five simple steps to end the rip-off fees hidden in your fund

1 MAKE CHARGES TRANSPARENT

INVESTMENT funds express their charges as a percentage of the money you invest in them.

The typical annual fee is 0.75 pc, so that means you should pay £7.50 for every £1,000 invested. But many experts believe this figure is meaningless — for example, what is it of? The amount you had in the fund at the start of the year, or the end?

The answer is neither, it’s actually somewhere in between — but that makes it hard to know exactly what you’re paying in cash terms. It’s also part of the reason why all too often the final amount you pay is substantially higher.

Fund managers use a figure known as the ongoing charges figure, or OCF, which is supposed to take into account additional costs such as that of buying and selling shares. But even this still doesn’t account for everything.

Recent research by one pension fund found that the actual annual cost of investing in a fund was anything between 5 pc and 250 pc more than the stated OCF percentage.

A report by the watchdog Financial Conduct Authority last year found that there were up to 38 different layers of hidden charges when investing in a fund.

What we should have is a pounds and pence figure so that, at the end of every year, investors can see exactly how much they have been charged for the service they have received.

Only then can savers make a truly informed decision about picking a fund and work out whether its performance is delivering acceptable value for money.

2 LET US SEE WHERE OUR CASH IS

WHEN you pick a fund, it’s important to know what companies the manager is invested in.

Yet the majority of funds publish only their ten biggest investments regularly. It means that for months on end you’ve no idea where else your money is invested.

UK funds are required only to reveal their entire list of investments once a year. But even then getting hold of that information can be difficult, particularly for savers who invest through a fund supermarket and so aren’t in direct contact with the fund company.

In the U.S., funds are required to publish their full list of holdings every three months as a minimum.

A minority of companies in the UK, including Woodford Investment Management, publish their lists every month, but this is voluntary.

But how are savers supposed to pick a fund if they don’t know what it is investing in?

One of the first rules of investing is to spread your money across different funds to lower your risk, so your money is exposed to different types of company and asset.

But if you can’t compare exactly where your money is invested, there is no way of knowing if you’re taking too much risk.

All funds should publish their full list of holdings monthly — making them fully available to all savers.

3 BAN EXCESSIVE ENTRY FEES

INVESTING is one of the few parts of the economy where it costs more to buy the service you want directly from the company offering it. So if you save money in a fund with the firm that manages the money, you’ll pay an upfront entry fee.

However, use a third party, such as a fund supermarket, and you won’t pay this fee, which is typically 5 pc.

That means if you’re investing £10,000 then £500 is immediately eaten up in costs. If that fund grew by 5 pc a year for ten years, the saver hit with these fees would be more than £ 1,600 worse off than someone who didn’t pay any entry fee.

On top of this, the investor will still be charged an annual management fee for the firm to look after the money. These entry charges may have been justifiable 20 years ago when administrating an investment was labour-intensive.

But today moving money in and out of funds is largely done by computers, which takes seconds and costs firms pennies.

These fees are archaic and excessive, and should be scrapped.

4 EXPOSE LAZY FUND BOSSES

CRITICS argue that the reason some fund managers don’t want to reveal their investments is because they aren’t doing what they are supposed to.

Every fund has a market against which it is judged — the FTSE 100 or S&P 500 for example — and this is known as the benchmark or index. The aim is for the fund to beat it. But research has shown that up to a third of funds in the UK are just copying their index, rather than a manager picking shares which will beat it.

Funds where managers actively pick investments are more expensive than those that use computers to track an index. So a saver in an active fund that tracks the index is probably paying more than they should.

If savers want a tracker fund, they can pay as little as 0.06 pc a year for one, instead of paying more than 1 pc for an active fund which is doing just the same.

The practice of a fund following an index when it shouldn’t be doing so is known as closetindex tracking.

If investment lists were published monthly then savers would be able to check far more easily if their fund was just tracking its index.

Gina Miller, founder of the True And Fair Campaign, for more transparent investing, believes managers should also print a percentage on their monthly fund fact sheet which shows how much of the fund is just copying its index.

5 TELL US WHAT THEY EARN

THE total pay and perks for M& G fund manager Richard Woolnough over the past two years is estimated to be an incredible £32.5 million.

Yet two of the three funds he manages are in the bottom-quarter of performers among their rivals.

His other fund, M&G Corporate Bond, is ranked 32 out of 105.

At least we know what he is paid, though. With the majority of fund managers, we don’t — so we can’t see how much they’re making from our money for the performance they give.

Savers have a right to know how much the manager is pocketing, that way we can tell if they are value for money.