Jeff Salway: No more ripping off clients for fund managers

John Griffith-Jones, chairman of the Financial Conduct Authority
John Griffith-Jones, chairman of the Financial Conduct Authority
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WE’RE coming for you… and we’ll get there the year after next. Probably.

That was the message last week to fund managers continuing to get away with hiding the true cost of investing from the millions saving into pension and investment funds.

The Financial Conduct Authority (FCA) on Wednesday set out the details of an antitrust review of the £6.6 trillion asset management industry investigating whether investors are getting value for money from fund managers. The noises from the industry suggest they expect an outcome hitting them where it hurts most.

They’ve got time to prepare, however, as the final report won’t be seen until early 2017. That would be almost 15 years after the Sandler review concluded consumers weren’t getting value for money from savings and investment products because of complex charging structures and lack of transparency that made effective comparison impossible. Sandler said fund managers were reporting charges in a way that was “neither clear nor consistent”. Nothing has changed on that front (even if the Sandler review did have some positive outcomes in other areas).

If you have money in funds, most likely through a pension or an Isa, it’s your money they’re investing – yet you’re not given any real clue what you’re paying them to invest it. They probably give you an annual management charge figure, or a total expense ratio. If you’re lucky you’ll find an ongoing charges figure buried in your paperwork.

But you’re still not told exactly what you’re paying, which means it is impossible to make effective comparisons.

The Pensions Institute estimates that the “visible” costs – those we know we’re paying – account for less than a fifth of the full costs that we actually pay.

Last year Railpen Investments, which manages more than £20 billion on behalf of some 350,000 scheme members, revealed the results of an 18-month project working out whether it was getting value for money from its investment managers. It found that the £70m it was paying in upfront fees was dwarfed by up to £280m of additional hidden fees and charges. “What we are getting billed is far less than what is being siphoned off underneath,” its chief executive said.

No wonder the industry is fighting tooth and nail against every step towards greater transparency.

Slowly but surely, however, it’s being forced to give ground. Rules drawn up in Europe on the disclosure of fund costs could see all costs incurred by the fund “taken into account in the amount to be disclosed”. This legislation is part of a bigger set of rules under ‘Mifid II’, which is supposed to take effect in January 2017 but unfortunately looks set be delayed by a year.

Among the practices in the FCA’s targets is “closet tracking”, where investors are paying active management charges for funds that do little more than follow the index. The effect of the higher fees means investors get returns lower than those on actual tracker funds. The True and Fair Campaign reckons investors lost £800m to closet trackers last year alone.

This is legalised fraud, but in an industry where it’s so rife that the victims barely know it, let alone see how badly they’re being ripped off.