Experts have called on the City watchdog to take decisive action after it published a damning review of the information sent by fund providers to ordinary savers and investors.
Its probe of 11 fund groups which manage investments worth £131 billion found that seven were unclear about the full charges that investors pay. Their fund marketing materials still use the annual management charge (AMC) as the headline fee, even though it excludes a range of other costs.
While the AMC includes costs such as portfolio management, it doesn’t include additional charges that can amount to an extra 0.9 per cent, according to the regulator.
It said fund firms that continue to emphasise the AMC in their marketing material don’t give savers and investors a “clear, combined” fees figure and may hinder investors’ “ability to compare charges”.
The Financial Conduct Authority (FCA) also uncovered poor descriptions of charges that didn’t “accurately reflect” how they were calculated.
It called on firms to replace the AMC with an “ongoing charges figure” (OCF) to give investors a better idea of the amount they pay in charges. However, it stopped short of taking action against the seven firms and declined to name and shame them.
Mark Polson, principal at Edinburgh-based consultancy The lang cat, described the AMC as “arbitrary” and a “marketing tool”. “It’s incredible that an industry claiming to be embracing transparency is trying to get people to compare charges that bear little relation to what they are actually paying,” said Polson.
“It’s inconvenient for an industry that focuses on price, but it’s impossible for investors to work out if they’re getting good value if they don’t know what they’re paying.”
Total fund costs typically cover administration, marketing and other outlays and are up to 30 per cent higher than the AMC, according to Justin Modray, of Candid Financial Advice. He cited the example of the £19.9bn Standard Life GARS fund, which he said has annual fund costs of between 0.9 and 0.14 per cent above those represented in the AMC.
“It’s a bit like Marks & Spencer telling you the price of the shirt is £20 and then charging an extra £4 for the buttons,” he said.
“When managers of large funds charge hefty additional costs to the fund you have to question whether they bothered negotiating with suppliers to try and save investors money,” he said.
Investors also have to add the cost of advice and other charges to the amount they end up forking out, said Modray.
“At times consumers may have up to a dozen different charges to try and get their heads around. And since these are usually quoted as percentages it is easy to overlook the actual cost.”
The Investment Management Association (IMA), which represents the £4.5 trillion UK open-ended fund industry, this week called on its members to stop using the AMC figure in marketingmaterial.
“The OCF provides a common standard for all the known costs and charges that a fund will bear in a single comprehensive ratio that is easy to understand and to compare,” said Daniel Godfrey, chief executive of the IMA.
“This is in stark contrast to the AMC because a range of other costs can be borne by the fund, making the AMC a poor reflection of the total cost at worst, and a poor basis for comparison at best.”
But the OCF still doesn’t go far enough in giving the true cost to investors, said Polson.
“The industry needs to grow up a little bit and not worry so much about telling people how much things costs,” he said.
“There are difficulties with some costs that are hard to express clearly, but there should be a way to do it.”