The fund industry is heading in the right direction when it comes to being frank on fees.
For many years accusations of ‘hidden fees’ have been levelled at the industry because many of the complex (implicit and explicit) costs fund managers have to bear are simply lifted out of investors’ capital.
Recently the regulator insisted that a single charging figure be promoted industry wide, and indeed the industry has started to publish solely the OCF, Europe’s standard calculation for ongoing charges on Ucits funds.
Last November the government’s top consumer panel, the Financial Services Consumer Panel (FSCP), issued a howling critique of fund management fees, calling for the managers to simply charge one upfront fee and bear all costs out of it themselves.
It now looks clear that fund managers are at least going to meet the FSCP halfway.
They are likely to do away with the practice of charging an investor an ‘annual management charge’ for investment services and then charging for other items separately out of a fund’s capital. Instead, they will increasingly charge all-in fees for all fund management costs that equal their OCFs and cover all the costs the OCFs encompass.
The problem is that while it is a step in the right direction, the OCF still doesn’t cover all the charges paid by a fund.This might seem like a trivial evolution, but what it does is to pass the burden of costs from funds’ investors to the fund manager – the manager will have to make a good estimate of forthcoming costs on a fund when calculating the OCF. If costs come in higher, the fund manager must cover the shortfall.
This model already exists at Neil Woodford’s new firm, Woodford Investment Management, which launched with a fixed all-in ‘fund management fee’.
Aberdeen is among the other fund houses actively considering this model.
So far, so good.
But the problem is that while it is a step in the right direction, the OCF still doesn’t cover all the charges paid by a fund.
What’s not covered includes the massive stamp duty costs of buying shares, dealing commissions, fund performance fees, and the entry or exit charges you pay to buy fund units.
However, industry sources tell me that at least one major firm is considering going even further, and charging an all-in fee that includes dealing costs, and possibly everything else.
The reason is that it is actually in the big groups’ interests to do that. Their funds’ dealing costs are far lower than the fees paid by smaller boutique firms to trade stocks because these giants use their scale to broker the best deals.
This fact is simply not visible under the current fee regime.
If all this pans out, we could be entering a world of full fee transparency in fund management. But could it also herald the death of the ‘pricey’ fund boutique?
John Kenchington is editor of Investment Adviser
