Research from SCM Direct has laid bare a pattern of hidden costs charged by fund managers. The wealth management firm, run by Alan and Gina Miller, has been a long-term advocate of greater transparency in the investment industry.
However, their findings may come as a surprise to some, with many fund managers charging double or triple their ‘at a glance’ fees.
Breakdown of Fees
SCM investigated the breakdown of fees on Fidelity and Hargreaves Lansdown for the 20 most significant funds in the UK All Companies sector. Their research exposed what they believe is a lack of transparency that is running rampant in the industry.
Hargreaves Lansdown’s average net charge for funds in the sector was 0.78 per cent. However, when platform and transaction costs, plus performance fees, were added on top, the charge rose almost double to 1.5 per cent.
It was a similar story for Fidelity. On their website site, their fees show as 1.07 per cent. However, once performance fees and platform costs were added, this shot up to 1.49 per cent.
With the JPM UK Equity Core fund, Hargreaves gave a net charge of 0.33 per cent. When all the charges add up, the fund costs 1.09 per cent.
This is not the first time the Miller’s have voiced their displeasure at the state of UK fund managers. Since 2012, their True and Fair campaign has sought reform in the investment and pensions sector.
In recent years, Gina has also drawn attention to “price fixing” in the industry. In 2017, she investigated 683 funds with £320bn under management and found that 70% had identical charges.
The MiFID II regulations from 2018 have forced the hands of many fund managers, exposing the hidden fees they’ve hidden from investors for years. The financial consultant Lang Cat underlined this in a post from 2018, revealing the scale of these extra charges.
Their research of charges suggested investors were paying an average of 30% more than advertised. However, in some cases, such as the JPM Global Macro Opportunities Fund, this number was as high as 85%.
Now, as SCM Direct has shown, this problem has arguably worsened in recent years.
Is It Time to Leave Fund Managers?
For example, Hargreaves Landsdown charges 0.45 per cent on the first £250,000 invested. Between £250,000 and £1million it’s 0.25 per cent, and 0.1 per cent on the next million. These fees are higher than those offered by similar funds.
The Scale of Fees and Lost Returns
According to an analysis by Candid Financial, the fees and lost returns involved are considerable. They looked at four investment options: Hargreaves London, Close Brothers, AJ Bell and Interactive Investor.
Hargreaves had the highest fees, with Interactive Investor charging flat fees of £9.99 and £19.99 for ISAS and Sipps, respectively.
If you invested £100,000 with each platform over 30 years, with an annual growth of 5%, this is what you would lose in fees and lost returns.
Hargreaves London: -£121,307
Close Brothers: -£103,144
AJ Bell: -£102,787
Interactive Investor: -£85,962
Fees should be a significant consideration for investors. The lack of transparency among fund managers can make a massive difference to returns.
Why Investors Should Be Cautious About Funds
Other hidden fee tricks that funds use were exposed in recent years. M&G and Jupiter were shown to be charging administration fees far above their rivals.
Indeed, by applying blanket admin fees and retaining any surplus, these funds were pocketing significant returns at their investor’s expense.
By indexing their admin fees to profits, each percentage increase saw them draw in more money, despite admin costs being a fixed expense.
The Cost of Investing in Funds
Mutual Funds and ETFs buy and sell shares of funds. These transaction costs can add up quickly because of their high volume, as index funds buy and sell shares as investors enter and exit the funds. Bogle puts these transaction costs at around 0.5%.
Shares should outperform cash. However, many funds keep cash as they await opportunities. This, according to Bogle, means 5% in cash = 0.3% in a missed opportunity for investors.
Buying into a loaded fund can cost around 5%. Investors can avoid this by using an advisor, which could cost about 1%. However, even if you bypass an advisor, you could be set to face brokerage fees.
Bogle suggests these charges total around 2.27%. This total may not seem huge, but when compounded, they become significant. He suggests that actively managed funds will shave a staggering 1/3 off of your actual returns after 40 years.
Alpesh Patel’s Conclusion
Investors should be careful when considering funds for investment or retirement. SCM Directs research confirms the scale of hidden and misleading fees, while John Bogle’s work demonstrates the damage to returns by investing in fund managers.
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Alpesh Patel OBE