Woodford sends shivers down peers’ spines

Since launching his own group, Mr Woodford has brought something unusual to fund management – transparency.

He is actually telling his investors how their money is being used and showing a breakdown of charges.

It must be sending shivers down the spines of his more cagey rivals who pay for their Porsches on the back of their clients’ meagre returns.

Research fees account for a mere 0.02 per cent of fees in the CF Woodford Equity Income fund. But over the Woodford business, £4m in charges will be absorbed rather than passed on to clients.

Across the industry, the Financial Conduct Authority estimates £1.5bn was spent on brokers’ research in 2012. That is an awful lot of money that could be returned to clients if other firms chose to follow Mr Woodford’s lead.

Sadly, reform and modernisation do not come easily to fund managers. The admirable Daniel Godfrey paid the price when he attempted to push them to focus more on the interests of clients.

Many would rather focus on the price of corporate hospitality at Twickenham or Cowes Week.

What many fund managers have failed to grasp is that the investment world has changed fundamentally since the glory days when high income and healthy returns meant their high charges would appear less significant.

The investment world has changed fundamentally since the glory days when high charges would appear less significant

This year dividend income is falling and overall returns are down. Investors can easily lose around half of their total return in management, platform and advice fees – that is if they get any return at all.

While the passive fund management sector is still dwarfed by active management, the gradual drift to the former continues as investors seek the certainty of lower charges and shun the uncertainty of potential future performance.

Vanguard upped the ante last week launching a suite of targeted retirement funds, all charging 0.24 per cent.

Of course, overall returns after charges will always be the investor’s greatest concern. But this is unpredictable, and many top investment funds continue to charge higher fees for so-called active management that merely shadows the FTSE indices.

The writing is on the wall, and if the traditional active managers fail to read it they will see a gradual leaching of their business to those who are prepared to modernise – the boutique firms delivering better returns and those offering core trackers at low cost.

Who knows, in a decade or so some may have to trade in the Porsche for a Prius.

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FCA must target exit charges

Hargreaves Lansdown recently published its latest numbers on customers incurring pension exit charges.

These showed that in the under 55s age bracket just over 10 per cent of 15,270 investor transactions had triggered penalty charges.

Of these the majority – 839 of 1,586 – had paid up to 5 per cent. Even this can be very difficult to justify, especially given the other charges routinely taken for year-upon-year of a pension contract.

But what of the remainder who faced charges which, in a few cases exceeded 40 per cent?

Perhaps worse, in the over-55s age bracket more than 16 per cent faced charges just to get at their own money.

I think it is reasonable to assume that those moving their money to Hargreaves and similar operations are probably among the more active and switched on investors.

So what is happening to the less active who stay put?

The point is that it is not only exit penalties the FCA should be targeting, but also the excessive ongoing charges that penalise those who leave their pension paid-up or are just too busy or poorly informed to move it.

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Annuity sales fall yet profits up...

Anyone who still harbours doubts about pension freedoms one year on, need only look at annuity rates to see their arguments founder.

Rates slumped by 17 per cent since the start of last year, knocking more than £400 a year off the income buyable with a £50,000 pension pot.

Aviva, for example, has admitted that while its sales of annuities have gone down, profits were up and its UK life and pension business is doing very nicely, thankyou.

While sales of annuities across the industry slumped initially due to pension freedoms, they still accounted for £1.1bn in the final three months of 2015, when 21,200 were purchased.

It is hard to escape the implication that insurers have, during a year of falling annuity popularity, been increasing their profit margins.

Just imagine what might have happened if annuity purchase were not now optional.