Fund industry still dragging its feet on making charges fully transparent

INVESTORS are being charged millions in hidden fees before they have made a penny on investment returns, it has been claimed.

More than a third of investors with an investment manager or independent financial adviser do not know how much they were charged last year, according to research commissioned by online wealth manager Nutmeg.

Over a quarter of those customers who did know what they were paying felt they were paying an ‘unreasonable’ amount for their manager or IFA.

On average, customers reported paying 1.69 per cent per annum of their overall investments. The average value of their investments was £160,000, which equates to £2,704 annually in fees – or over £108,000 across 40 years.

Nick Hungerford, chief executive of Nutmeg, said: “Another year passes, and it feels like, as an industry, we’ve barely made any progress in simplifying fees. There is still far too little transparency for the consumer; the charges are still far too high.”

Nutmeg lists 20 charges investors could pay, including set-up costs, trading fees, inactivity fees for not trading, platform fees, custodian fees, wrapper fees, foreign exchange fees, and charges for dividend reinvestment, portfolio rebalancing, a wrapper, and for exit

Mr Hungerford said: “For those customers that don’t know how much they are paying or those that are reluctant to check, there is a huge cost to inaction. Investment managers and IFAs are failing customers – they have a duty to give customers clarity not only about what they pay, but on how charges are structured.

“Instead charges are complicated and opaque – to the absurd extent that when Nutmeg wants to find out a given wealth manager’s latest fees, we have to commission third-party researchers to do mystery shopping.”

Last year the Investment Assoc- iation, representing the £5.5 trillion unit trust industry, saw director-general Daniel Godfrey clash with some of the UK’s biggest fund managers over proposed reforms.

M&G, Schroders, Aberdeen, Invesco Perpetual and Fidelity were all reported to be considering leaving the IA, with sources saying Mr Godfrey was seen as “far too aggressive over reforms on the transparency of fund performance fees and transaction costs”. None of the firms has withdrawn, but Mr Godfrey resigned in October.

Gina Miller of SCM Direct, an online wealth manager, who has campaigned for greater clarity in the fund industry, claimed that industry big guns had resisted “even halfway measures, aimed at bringing in genuine transparency”.

But the IA has rejected calls for a “single figure” cost of investing to be disclosed across all funds, saying it is “misleading” because it includes only estimates of transaction costs.

Guy Sears, IA’s interim chief executive, said earlier this month it had consumer organisation support for “the next generation of transparency” and “new levels of disclosure to be introduced under European rules planned for the future”.

The IA said this week it is now “developing a framework on which it would hold an open consultation” in the autumn.

Meanwhile, investors who bought “off-the-page” from fund managers, or who used an adviser they have not heard from in years, could be paying 50 per cent more than other investors from next month.

From April 6, fund managers are no longer allowed to pay commission to platforms, and active investors who do not use an adviser are getting the benefit in lower fund charges.

But most fund managers still pay annual “trail” commission on historical transactions to advisers, which keeps fund charges higher even for clients who are not actually getting any advice.

So far only Standard Life and Legg Mason, which owns Martin Currie, have said they will scrap trail commission and cut fund charges in order to treat all investors equally.

A study this week by Momentum Pensions found 47 per cent of pensions advisers saying clients had been hit by unexpected charges, and they found it hard to compare charging structures.

An other year passes, and it feels like, as an industry, we’ve barely made any progress in simplifying fees