OpinionMay 25 2016

The fog of fees

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I attended the two-day Morningstar Investment Conference in London recently and a key debate on the fog surrounding investment fees struck home with me.

The conference itself was attended by several hundred financial planners and advisers and was notable for the quality of its speakers, many of them distinguished and veteran fund managers, some flown in from the US and other countries to speak at the event.

The quality of sessions was as high as ever but the debate on fund fee transparency ignited the event and shone much light on the dreadful opaqueness of fees which still surrounds fund management, in spite of many efforts at reform.

The panel, which included ex-Investment Association chief executive Daniel Godfrey, Hermes chief executive Saker Nusseibeh and Gina Miller, a founder of wealth manager SCM Private, concluded the fund management sector has a very long way to go to improve fund fee transparency.

There was much criticism of the innumerable additional fees and charges added to fund purchase or to fund management. Even some industry veterans admitted to confusion when it comes to working out the actual cost of fund acquisition. Platforms and multi-manager approaches have just made things worse.

Their views were backed up by research for MoneyFarm, the digital wealth manager, which found that 81 per cent of private investors still think that investment advice is “biased towards generating fees for the industry rather than towards delivering better investment performance.”

Worryingly, the research by MoneyFarm also suggests that high fees are now seen as such a problem that a substantial proportion of investors are turning their back on financial advice and trying a DIY approach to investing.

MoneyFarm says a third (33 per cent) of 761 savers / Isa holders surveyed do not seek expert investment advice because they believe “commission costs will be too expensive.”

I would fundamentally disagree that a DIY approach is better for all investors because I believe that for most people, if they can afford it, financial advice still adds significant value to investment selection and returns, but the point MoneyFarm makes about high fees is a fair one.

So what is to be done? Well, in one sense, the industry has begun to try its hand at reform. Recent changes on platforms with clean share classes have been welcome and help to make different fee elements more obvious, but the Morningstar panel should be applauded for coming up with what is, in essence, an obvious solution – “one number.”

A single number – agreed by the industry - that covers all costs and fees would make comparisons between fund options far more transparent. It seems the obvious solution, so why does the fund management sector not grab it?

Competition is one factor. Any provider opting for this method alone would risk losing out to competitors who disguised charges. There will inevitably be calls for a level playing field. Here the industry bodies, the Investment Association, and the regulator have a key role to play in influencing change.

Encouraging providers to agree to a mandatory method for disclosing all fund charges and fees in one number would be an enormous step forward for the industry and help build a stronger bond of trust with investors.

Encouraging providers to agree to a mandatory method for disclosing all fund charges in one number would be an enormous step forward

It is interesting to note that in other sectors with notoriously opaque charging structures, such as telecoms, budget airlines, broadband suppliers, mobile phone companies and others, there are similar calls for simpler, more easily comparable pricing so it is a national trend, not just an issue for fund management.

Of course, some might argue making all fees comparable via a one number system just would not work or is naïve, but I do not buy that. On the contrary, I believe a step toward this system could herald a very important step forward for the fund management sector and would ultimately be good for business.

One obstacle holding back the mass appeal of funds is their very opaqueness. They are too complicated and too expensive, especially when advisory fees are added.

With the arrival of robo-advisers and low-cost platforms, the fund management sector needs to reform itself to be ready for the future. The world of investing will likely look very different 10 years from now and fuzzy or foggy charging structures just will not wash any more.

The positive news is that for an industry that manages billions of pounds in global investment each day, none of this is beyond the wit of fund management companies. Indeed it could happen very soon if the will is there.

Financial advisers and their clients will thank fund managers for making their lives much easier and a new generation of investors could be encouraged to consider funds if fee transparency via a “one number” system becomes a reality.

Kevin O’Donnell is a financial writer and journalist