REVEALED: True scale of fees that eat your savings

Funds charge up to FOUR TIMES more than the cost they advertise

SAVERS are paying up to four times more than they thought to invest in the most popular funds, Money Mail research reveals.

Under new EU-wide rules introduced this month, investment funds must now declare exactly how much they deduct from savers’ cash every year.

Investment companies have had to come clean on the true cost of charges for performance or for buying and selling shares, which drain savers’ pots without them knowing.

For the first time, fund supermarkets such as Hargreaves Lansdown are putting these figures — which until now have been kept hidden — into pounds and pence.

Our analysis of the most popular 20 funds shows the true cost of investing is hundreds of pounds higher once hidden charges are taken into account. In the worst example, a fund charged nearly £600 in extra fees. Henderson’s UK Absolute Return fund, which holds £2.6 billion of savers’ cash, says it charges an annual fee of 1.06 pc. This was the only fee advertised to investors before the new rules came into effect.

That would mean if the fund grew 4pc a year for five years you would pay £265.19 on a £5,000 investment, according to figures from stockbroker Hargreaves Lansdown.

However, the fund would also deduct £197.46 to cover share trades and a whopping £381.62 in performance fees. It means the cost of investing would have been £844.27 — £579.08 more than the advertised annual charge would lead you to believe.

Justin Modray, of adviser Candid Financial Advice, says: ‘If you’re in a fund that is underperforming and has high fees, finding out that the manager is racking up fees trading shares will rub salt in the wound.’

Laith Khalaf, a senior analyst at Hargreaves Lansdown, says: ‘Having this level of information will shine a light on the fund fees savers are charged, and it may influence what they invest in.’

For years, Money Mail has called for transparency on fund fees. We argued that investors deserved to know the scale of the deductions from their nest eggs — and stressed that publishing the figures was vital in holding funds to account.

The investment industry repeatedly claimed it had nothing to hide. The Investment Association trade body claimed in 2016 it had found ‘zero evidence’ of hidden fees, referring to them as the ‘Loch Ness Monster of investments’. But the new ‘Mifid II’ (Markets in Financial Instruments Directive) rules have exposed huge gaps between the charges declared and the real cost of investing.

Of the 20 most popular funds, Old Mutual Global Equity Absolute Return had the second biggest difference between its advertised charge and the true cost. The fund, which controls £9.4billion, has an annual fee of 0.85pc. On £5,000 growing at 4pc a year over five years, this would work out at £215.72. But the fund manager would also charge an estimated £104.04 to trade shares, plus a £166.37 performance fee if returns exceed expectations. In total, £486.13 would be deducted over five years — more than double the £215.72 fees declared. The £2 billion Investec UK Alpha fund would deduct £217.92 from £5,000 over five years based on its 0.83pc a year ongoing charge. But once trading costs are included the figure shoots up to £385.92 — an extra £168.

Aviva Investors Multi-Strategy Target Income, which manages £2.2 billion and has an ongoing fee of 0.85pc, would charge £225.18 over five years. However, it would also deduct £66.36 for share trading, meaning it would cost £291.54 in total — £66.36 more.

Neil Woodford, one of Britain’s most successful investors, has displayed the true cost of investing in his funds since April 2016.

Lindsell Train UK Equity was another fund where the full 0.72 pc charge was declared up front. The fund rarely buys and sells shares so there were no additional transaction fees on average.

Mike Barrett, of consultancy The Lang Cat, which compiled the figures, says: ‘If an investor sees an annual charge of 0.5 pc, it’s reasonable to think that is what they are being charged. This will come as a shock to most people. You’ve got to look at the total cost of a fund — and any charge from your Isa provider, before making up your mind about whether to invest.’

A spokeswoman for the Investment Association says: ‘The Investment Association fully supports transparency of costs and charges so customers understand what they are paying for.

‘However, the way the new methodology to calculate transaction costs was designed will confuse and mislead investors and could ultimately defeat the goal of greater transparency.’