Fund managers could be overcharging British investors as much as £6.7bn each year for expensive supposedly “actively” managed funds that fail to outperform their benchmarks, according to an advice firm.
Investors have ploughed £924bn into actively managed funds in the UK, of which three quarters underperform their benchmarks, figures from Salisbury House Wealth indicate.
The firm said an actively managed portfolio costs investors around 1.48 per cent in fees, as a percentage of the fund’s value, compared to passive tracker funds, which often have a fee of around 0.5 per cent.
In theory, the cost should be absorbed by the higher returns of active funds, but Tim Holmes, managing director of Salisbury House Wealth, said savers are suffering “severely” due to the weak returns and high fees.
He said the data highlights the “urgent need” for savers and their financial advisers to play a more active role when it comes to ensuring they do not leave their funds with underperforming fund managers.
UK assets under management | |
Total UK-domiciled assets under management | £1,011bn |
% of UK-domiciled assets under management that are actively managed | 91.4% |
Actively managed UK-domiciled assets under management (91.4% of £1,011bn) | £924bn |
% of UK funds underperforming benchmark | 74.7% |
Amount stored in underperforming active funds (74.7% of £924bn) | £690.2bn |
Cost of fees to investors | |
Average fee for actively managed funds | 1.48% |
Average fee for passively managed funds | 0.50% |
Average fees on funds | |
Fees on underperforming active fund (£690.2bn x 1.48%) | £10.2bn |
Fees on passive funds (£690.2bn x 0.5%) | £3.5bn |
Amount overcharged in fees to UK savers | |
£6.7bn | |
These findings come shortly after the release of the Financial Conduct Authority's report into the asset management industry, which criticised the "limited" competition in the active fund sector.
Mr Holmes warned it is “dangerously easy” to invest money and to forget about it for several years, which leaves people vulnerable to being overcharged by fund managers.
The issue, he said, is particularly problematic when it comes to defined contribution pension schemes from previous jobs which savers no longer pay much attention to.
He said: “Many people, for example, forget to analyse funds from workplace pension set-ups when moving jobs and to consider whether transferring these or switching funds would be suitable moving forward.
“This means that, a number of jobs down the line, they may find they have several separate pockets of money – all of which are performing poorly.”
Mr Holmes advised investors and advisers to scrutinise the performance of funds on a regular basis to ensure that returns are being maintained at a healthy level.
“Those who have not paid attention to their investment performances and demanded the best out of their fund managers could find themselves severely undercut when it comes to their financial situation.”
