Are investors any closer to understanding fund fees?

  • Learn about the various charges for advisers and asset managers
  • Be able to describe how these charges work
  • Gain an understanding of how regulation is likely to shape the future of the industry
Are investors any closer to understanding fund fees?

Finding out just what savers are paying for funds is an age-old problem in the investment world, and the path to increased transparency has proved an arduous one.

Intermediaries and other buyers have been presented with annual management charges, total expense ratios and latterly ongoing charge figures, but discovering the total cost of investing remains an elusive goal for most.

Campaigners for reform say that these figures, shown in percentage form down to two decimal points and often hidden away in Key Investor Information Documents (Kiids), do little to actually communicate the final cost to the investor.

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The multitude of advisers who prefer active management point to the track records of these funds, particularly as their returns are displayed after charges. 

Critics say that investors have a right to know the full story; as Table 1 shows, FCA research has estimated that additional expenses by investment groups can add upwards of 20 basis points (bps) to overall costs – a considerable amount in the context of a typical fund’s headline charge of around 75 bps. 

And growing price pressures across the value chain mean intermediaries of all kinds are keen to scrutinise their costs more closely. 

Regulatory reforms are on the way. Mifid II will come into effect in January 2018, ruling that investors must be told ‘appropriate details of all costs and charges within good time’. That includes any one-off charges, transaction costs, performance fees, stamp duty or broker commissions. 

With an eye on these changes, the FCA has said that investors should be able to compare products on a like-for-like basis and to determine value for money. 

The regulator wants to promote increased transparency and competition via this “all-in fee”, as well as the standardisation of costs into an easy-to-understand template. 

Table 1: Asset-weighted average charges (bps)  
% ChargeAMCAdminCustodyBrokerOtherTotal
Sample of 11 firms. Source: FCA. Copyright: Money Management


One longstanding proposal for making costs clearer to end investors is for figures to be expressed in pounds and pence, rather than as a percentage. The idea was vocally supported by former Investment Association (IA) chief executive Daniel Godfrey, and the trade body backs the idea now it is set to be brought in under Mifid II.

“Transparent costs and charges are vital so that consumers can understand how well their investments are performing and make informed choices on where to invest their money. Investors deserve to know how much they are paying in pounds and pence when they save,” a spokesperson for the IA says.

Others say the increased focus on charges is the wrong approach.

Rob Morgan, investment analyst at Charles Stanley, says: “Cost has always been important to me as a fund a selector, but what you need to consider is how much value a manager is adding for what they are charging – sometimes it’s not a lot.” 

A useful analogy is the rise of price comparison websites used by consumers to find car or home insurance policies. While there are details on these websites about the services offered by each policy – whether legal assistance or breakdown cover is provided and the payout ratio of the provider, for example – search results are usually displayed by price, meaning this is often the basis on which a consumer makes their choice.