THE winds of change are blowing through the UK’s bloated fund management industry – and the firms that have for so long exploited ordinary investors and pension savers know it only too well.
Fund managers have made an art of charging investors vast sums of money without ever telling them what they’re actually paying for and without generating returns that justify those fees.
They’ll continue doing so for a time yet, but patience is finally running out.
I’ve written about this for more than a decade, over which time we’ve had piecemeal improvements but little real movement towards genuine transparency.
The RSA, a think-tank, has calculated that over 60 years of a pension pot (including 40 years of savings and 20 years of drawdown) a 1.5 per cent annual charge would cut the pension paid out by nearly 40 per cent.
It’s not just the scale of the charges that’s the problem, but the extent to which they are disclosed. If you don’t know the exact cost of investing there’s no basis for effective comparison – a state of affairs that stacks the odds firmly in favour of the industry.
With new rules giving retirees greater freedom with their pension pots from April, it’s more important than ever that investors can make a properly informed choice.
Fund managers continue to insist that even they don’t know their total costs. That’s not true, according to James Budden of Baillie Gifford, who last year said fund managers “just cannot be bothered to do it”.
Their resistance is due entirely to the fact that it’s not in their interests to provide a fully transparent charge.
They used to point investors at the “annual management charge”, which has now been widely discredited. Then they said the “total expense ratio” represented the true cost of investing, except it did nothing of the sort. Now the industry is adopting the “ongoing fund charge”, a further improvement but one that still doesn’t include trading costs.
The latest proposals from asset management trade body the Investment Association represent another step forward. It suggests that charges for fund management are disclosed separately to transaction costs.
But as Gina Miller, founder of SCM Direct and the True and Fair Campaign, pointed out, the proposals “fall far short of granting consumers their basic rights to know how much they are paying”.
Fund managers know the game is up and some groups are taking a lead, as outlined in the main article on this page. Pressure is growing on the City regulator, which until now has been cowed into timidity by the fund management lobby, to take more decisive action.
The rest of the industry is simply calculating how long it can keep playing for time before regulation – in Europe and the UK – forces them to finally come clean.