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That UK retail funds scored lower in regards to fees and expenses than a number of other European markets, as detailed in a recent Morningstar report, has hardly shocked industry observers.

The report looked at the investor experience in 16 countries, and highlighted fund charges as one area where the UK could improve. The UK was ranked equal with Spain and Singapore on charges, while only Hong Kong and Canada scored lower rankings.

“Fees and expenses eat away fund performance, and it is important to determine whether fees are reasonable, and encourage the fund industry to lower them when they are not,” the report asserted, after assessing investor experiences around the world.

Andrew Merricks, head of investments at Skerritt Consultants, says he is unsurprised by the general tone of the report’s findings towards charges.

“A lot can be traced back to the old culture of insurance companies,” he explains. “Savings and investment companies are based around the insurance industry with the high charges they had.

Mr Merricks says charges have traditionally been higher because of associated costs to the asset management companies, such as the UK’s approach to the labour-intensive way it markets products to the adviser community.

John Rekenthaler, vice-president of research at Morningstar, told IFAs recently one way to encourage lower charges would be greater utilisation of low-cost ETFs, addingcompanies were more likely to respond to such market forces. The long-awaited entry of low-charging, US giant Vanguard to the market is likely to add further pressure on perceived high charges in the UK.

Nick Brookes, head of research and investment strategy at ETF Securities, says ETFs offer investors lower charges for often better results.

“Our ETCs charge a management fee of approximately 45 basis points per year. The average managed fund charges anywhere from 1-5 per cent,” he says. “Often those funds have upfront and back-end charges as well.”

“Most UK equity income funds that are designed to outperform the FTSE 100 underperform, so you’re effectively paying higher fees for a fund that is underperforming,” he adds. “If you buy an ETF that tracks the FTSE 100 you’re getting a fund that delivers at a much lower cost.”

Yet, the debate over fees and expenses charged by actively-managed funds still rages as some companies assert these funds require more research and closer management.

Mr Merricks says the argument stands up if investors are able to see the value of active management and the extra benefits of research and expertise.

“There are so many funds, and there are some that charge the same fees regardless of whether they are any good or not,” he says. “A lot of people are paying more than they need to.”

Paul Mumford, senior investment director at Cavendish Asset Management, says firms that run funds investing in markets outside of the UK, need to undertake extra research that can’t be gathered from brokers and other local sources.

“There is a need for quite a lot of research for managing funds, it’s a hidden area that perhaps investors don’t appreciate fully," he says. “You quite often find in overseas areas you get a different opinion to the brokers in London, because they are pushing a particular stock."

Mr Mumford says the costs associated with research and visits to local markets are borne by the asset management company and are not included in the funds’ fees and expenses.

Initial sales charges in the UK were highlighted by the report, which claimed they fell between 2 and 3.99 per cent, while higher total expense ratios were also underlined. Mr Rekenthaler said greater disclosure of the TER history for UK funds would also allow investors to scrutinise year-to-year changes in charges.

Whether initial management charges are an issue for UK investors has been questioned as charges vary depending on how the fund is accessed: rates are negotiable, with some fund supermarkets, for example, offering more competitive rates.

IMA figures show that of the 1,623-fund universe, only 119 have TERs equal to or less than 1 per cent.

However, despite criticism aimed at countries where charges are high, the report discounted the effect of costs on fund selection, adding many investors are not aware of lower-cost alternatives.

Rob Langston is a reporter at Investment Adviser