Investors (and not managers) must come first

THIS country possesses a vibrant fund management industry, providing investors with all the tools to build long-term wealth, whether through pensions or tax-friendly Isas.

Yet it doesn’t mean everything is hunky dory. Far from it. There are issues the industry needs to tackle so as to maintain its stellar reputation.

Widespread ‘fat cattery’ is one, a plague that fuels suspicion among many investors – me and you – that we are paying too high a price (in terms of fund charges) to line the pockets of executives (fund managers and their bosses).

Thankfully, there are some forward-thinking groups prepared to grasp this nettle.

Woodford Investment Management, set up by star fund manager Neil Woodford two years ago, has just confirmed it will no longer pay its 35 employees bonuses, arguing there is little correlation between bonus and performance.

Instead, employees will receive higher fixed salaries. It’s a step in the right direction and one that other investment houses should follow.

There is also the issue of what constitutes a ‘fair’ charge for providing an investment fund where there is a manager at the helm employed to outperform an appropriate stock market benchmark.

Too many of these so-called ‘active’ managers fail to live up to their name, at best tracking their index, at worst underperforming by a country mile.

They do this while levying outrageous ongoing charges – anything between 1.5 per cent and 2 per cent a year.

Charles Plowden, a senior partner at Edinburgh-based investment house Baillie Gifford, is a passionate believer in active fund management.

He argues it can thrive but only if it is underpinned by a combination of fair charges (1 per cent and below), low portfolio turnover and a willingness by managers to go outside the constituents of their benchmarks to find investors value.

Baillie Gifford now publishes for all its funds ‘an active share’ figure.

This indicates the percentage of a fund’s portfolio that differs from its benchmark index. The higher the percentage, the more actively the fund is being managed.

Another step in the right direction towards a fund management industry where investors’ interests – and not managers’ – come first. PROTECTING yourself against the financial consequences of long-term illness is not sexy. In fact, like all insurance, it burns a hole in your pocket which puts a lot of people off.

Yet more people are waking up to the fact that it is better to be safe than sorry. The latest statistics from the Association of British Insurers confirm that the number of people with income protection insurance is on the up.

This cover pays a monthly income in the event of serious illness and is the deluxe form of financial protection.

At the end of last year, 3,248,000 people were covered by income protection insurance, purchased either individually or through their employer. This compares with 3,170,000 in 2014, an overall increase of 2.5 per cent.

Although the uptick is small and from a low base – there are more than 31million workers in the UK – it’s better than nothing. There are a number of reasons for the increase. For starters, there is a growing realisation that the state will no longer come riding to the rescue if we are unable to work because of illness or an accident.

There has also been an awakening among some insurers that take-up will only improve if they get off their backsides and bang the protection drum. The Seven Families Campaign did exactly that. By providing seven families impacted by long-term illness with benefit from an income protection policy for a year, it was able to demonstrate the cover’s positive impact – not only in bolstering a family’s finances but in encouraging people through rehabilitation to take up some form of employment.

Raluca Boroianu-Omura, the association’s head of protection and health, says one million workers every year are unable to continue in employment because of ill health. In such circumstances, she adds, income protection can act as ‘an essential safety net’.

Of course, you would expect Boroianu-Omura to big up the virtues of the products her members sell. But she’s right – income protection is an insurance you should consider.

So, if your employer offers it, snap it up. If not, search out a broker (Highclere Financial Services and London & Country lead the field) which will find you an appropriate policy.

‘Fat cattery’ is a plague that fuels the suspicion we are all simply paying too much