Fund Fee Transparency In Focus As Times Investigation Shows Fees Still Hidden
A year ago the FCA, the UK’s financial sector watchdog, ordered fund houses to clean up the way they add charges to funds promoted to UK investors. These were often far from transparent with retail investors often unclear exactly how much of the money they paid into funds was going to the provider. However, a year on and a new investigation by The Sunday Times into the transparency of fund fees suggests than some providers have still not made the kind of changes requested of them. In some cases, investors could be losing up to half of the returns generated by the assets the fund is invested in charges. The regulations introduced a year ago demanded that funds advertise all charges as a single percentage figure, also provided in pounds and pence for additional clarity. And charges need to be clearly displayed before an investor makes any commitment to invest. The idea is to not only mean investors know exactly what they will be paying to invest through a fund without the need to make complicated calculations but also that it is easier for them to compare competing offers. However, the Sunday Times’ Money investigation discovered that different fund providers have interpreted the new regulations in different ways. The result is that some are still managing to hide full, transparent disclosure until investors have signed up, at which point the final bill can triple once all fees are accounted for. Fund charges represented differently by different providers still make comparison difficult. And up until now, no fund house has been penalised by the FCA for failing to adhere to the new demands for transparency. There are, however, fund providers who are setting a good example. The Sunday Times highlights that Hargreaves Lansdown, the UK’s biggest investment platform by market share, together with Tilney BestInvest and Fidelity are doing well by their investors. All three clearly publish the cost of funds, platform charges and transaction fees before a customer opens an account. Chelsea Financial Services is part of the way there, clearly disclosing charges that apply to the 100 funds it recommends. However, it offers over 2000 in total and full details on the rest are only displayed to registered account holders. Taken to task as still failing in their transparency levels are the Share Centre, Charles Stanley, Interactive Investor and AJ Bell YouInvest. Significant variations in the charges applied by otherwise comparable funds can have a significant impact on the returns investors achieve. With average long term returns historically around 5% annually, the difference between fund charges totalling 1% and 2% is major. Over 20 years, the recommended outlook for an investment portfolio, a £50,000 pension fund returning an average return of 5% would generate total profits of £82,665 absent of any fees or charges. If fees amount to 1% of the capital invested that profit falls to £59,556, a hit of 28% over the whole period. However, if fees add up to 2%, that falls to £40, 206, costing the investor almost £20,000 over the 20-year period. Investment returns are accumulatively boosted over the long term by the compound effect when the returns of one year are added back into the investment pot. The same rule means returns suffer more than many investors may suspect over the long term when what seems like a relatively insignificant 1% per annum is lost to higher charges. Critics of the FCA argue that the industry watchdog has not done enough to enforce its new fees transparency directive. However, in the meanwhile, those investing online can also vote with their investment capital by shunning fund providers and investment platforms that fail to do enough around fee transparency on their own initiative.
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