The Truth About Fund Fees

ASK THE EXPERT: Fund charges may look like they've come down thanks to regulation, but the truth is fund managers are now pocketing more than ever

Emma Wall 26 June, 2014 | 9:25AM
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Emma Wall: Hello and welcome to the Morningstar series 'Ask the Expert'. I'm Emma Wall and here with me today is Mark Polson of The Lang Cat to talk about charges. Hello Mark.

Mark Polson: Hi, Emma.

Wall: Is there an argument that perhaps, fees are only moving one way, when actually the asset management business is a big business they should driving cost down. They should be trying to include more things into this low figure, rather than asking us to add them all up.

Polson: I mean I have been to quite a lot of the offices of the fund managers and none of them are working out, the back of a lorry or anything, lots of very posh reception desks, big tellys, they are very into big tellys. Lots of very good looking people all around the place, impressive wrist watches and the whole bit. None of them comes cheap especially the wrist watches. So we are going to get paid for and I think that through the big changes that have come in the retail investment space in the last year or two with the retail distribution review. Actually it's been a shot in the arm for fund managers.

So for investors they may see the cost of using platforms holding investments, coming down, they may see trading charges under pressure, if they are trading equities or bonds or ETFs. But fund charges look like they've come down. Because they were at 1.5% normally and that included the platform charge. Now they are either 1% to 0.75% or in some cases 0.65% or even less, if we look at the launch of the Woodford's fund that’s in everybody's mind at the moment. If you buy that through Hargreaves Lansdown, you can get that down to I believe 0.6%, whereas it might be 0.75% on a different platform.

So that looks less than 1.5%, so it must be good but the truth is the fund managers were never keeping all of that 1.5%, they were paying it away to lots of different people. Now they're not doing that anymore and the average take one fund manager told me, post RDR (Retail Distribution Review) when it was meant to get cheaper for investors, is 11 basis points or 0.11% higher than it was in the old world.

So he was loving it. This new transparent world he thinks is brilliant because he's making more money.

And we've seen huge pressure on platforms, on advisors for any investors that use a financial advisor. Their margins are really under pressure. Product providers as well. Fund manager seem to be escaping that right now. I am not sure how healthy that is.

Wall: And what's it going to take then more regulation or private investors just being more vigilant about what they're investing in.

Polson: I think transparency is a huge part of it. Sunlight is a best disinfectant and this industry could use some disinfecting. So the more that commentators is in the press and journalists and indeed investors and what's so great about the internet age is if we look at the comment boards that investors can use.

There are some highly knowledgeable people there – there are some nutters as well – but you can learn to just bother nutters, but there are some guys that really know what they are talking about, and they'll help. You can watch them helping, less experienced investors pick their way through some of the stuff which I think is great, it's absolutely fantastic.

So as people come to understand the constituent elements of the costs of holding a fund in particular, the shares are pretty easy to work out, but funds are I mean really hard.

That will then drive investor behavior and very quickly you'll see prices either start to consolidate be easier to understand and then probably start to fall.

The investment industry is a copycat industry, full of herding instincts. We saw BlackRock I think cut some of its passive fund charges recently and it didn’t take long before other's were doing exactly the same thing, they were only talking a couple of basis points.

Wall: It makes all the difference.

Polson: Well it does and particularly if you are investing large amounts of money. If it's £50 a month and it's probably not all that important. But if you are an institution or a pension fund or you are running a family trust for example you might be placing very large investments and yes five basis points, 10 basis points can really be worth having, it's better in your pocket than theirs.

Wall: Mark, thank you very much.

Polson: That’s a pleasure.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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