Excessive charges on more than a quarter of fund sales means UK investors could be paying £1.8bn in unnecessary costs every year, according to a new study.
The report, published in the Journal of Financial Economics, estimated 26 per cent of the £911bn worth of funds sold in the UK during 2015 were ‘closet-trackers’ or managed passively.
This comes after the Financial Conduct Authority announced plans to crack down on those fund houses which fail to make it clear when funds replicate index benchmarks.
Investment analysts said the industry is “riddled” with unfair fees for index-linked products.
Digital wealth management firm MoneyFarm suggested passive funds disguised as more expensive actively managed portfolios can eat into investors’ returns, claiming these lost fees should achieve returns amounting to £5bn over thirty years.
Roberto Rossignoli, portfolio manager at MoneyFarm, said passively-managed funds cost investors around 0.5 per cent in fees, whereas an actively managed portfolio costs investors around 1.25 per cent.
He said such closet indexing leaves UK investors worse off than they would have been if they had opted for a cheaper portfolio in the first place, due to the higher rates they are charged.
“Practices like these are what give the fund management industry a bad name. Closet indexing is like selling someone a Ferrari that has been fitted with a Fiat engine – without telling them.”
Mr Rossignoli said it is “absolutely essential” the fund management industry builds a culture of transparency to ensure that investors or savers are able to “fully trust” their financial advisers.