InvestmentsMar 11 2013

UK managers burying £1bn costs in ‘bundled’ commissions

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Managers of actively managed funds in the UK are ‘bundling’ £1bn of unspecified costs and expenditure into trading fees by recouping broker commissions from investors at rates 5x higher than their passive peers, according to data collated by SCM Private.

SCM Private, whose founders Alan and Gina Miller established the True and Fair Campaign, claimed active managers could be bundling more than £1bn in costs into unclear trading charges in order to recover money spent elsewhere.

The firm analysed the 34 largest UK equity retail funds including both active and passive funds, which together hold £103.4bn in investor money.

By comparing actively managed funds with similar passive funds, the company found the average UK equity index fund pays a commission rate of 2.1 basis points. In stark contrast, UK equity actively-managed funds took an average commission of 10.4bp.

When this result is applied to the overall £1,800bn invested in equities through unit trusts, investment trusts and pension funds and is adjusted for the higher turnover seen in smaller funds, SCM estimates overall commission paid to brokers by active managers is around £1.36bn.

The figures would mean that around three-quarters of this, equating to more than £1bn, is being used for something other than paying for trading.

SCM has suggested these costs could be largely made up of third-party research, while others have claimed any fees paid out to gain access to senior company figures would also likely be buried in this way.

Last week FTAdviser sister title the Financial Times reported that the Financial Services Authority is set to levy multimillion-pound fines on asset managers for using clients’ money to get access to companies as part of the unfolding “cash for access” scandal.

Gina Miller, founding partner of SCM Private, said: “This is a staggering sum and a deeply unethical practice given that most investors will assume they are paying for fund managers to undertake research as part of the service they are being charged for via the separate annual management fee.

“Yet again, our analysis demonstrates the costs investors think they are paying are just the tip of the iceberg. It is time to end this sham and ensure investors are aware of the true total costs of their investments.”