James Coney  

Competition is the only way to drive down fees

James Coney

James Coney

It is not fund fees that matter: it is performance.

That is the same line that is trotted out every time I raise the issue of transparency of charges with fund managers.

Of course, it is true. I would not mind that I am in the most expensive fund if the manager does a fantastic job. But even then, I do not want to be taken advantage of. How do I know that the 5 per cent annual growth I am getting could not be 6 per cent if the fund manager was not greedily gobbling up extra charges?

That extra annual 1 per cent could boost a saver’s pot by about a third over a lifetime.

Research shows that while fees on passive funds have fallen by 28 per cent over the past five years, those on active funds have dropped by 18 per cent.

In a normal market, where consumers act in a rational way and all information about pricing and performance is easily accessible and comprehensible, competitive pressures will keep prices down.

Fund management is not a normal market. Research by Morningstar shows that while fees on passive funds have fallen by 28 per cent over the past five years, those on active funds have declined by 18 per cent. They have fallen, that is the good news. 

Trackers are far cheaper. On UK larger companies, the average passive fund charge is now 0.3 per cent, while the average active fund is 1.03 per cent. I have little doubt of the intention of the Investment Association in pushing for transparency, and for a more healthy debate about the value of fund management, which includes the true cost.

Fund managers should heed the example of the adviser community. I remember the same conversation by the Association of Independent Financial Advisers several years ago, when it was trying to convince advisers they should be absolutely clear about the cost of advice, including trail commission.

Many firms refused – and then look what happened.

Competition is the only way to drive down prices. We know that the Financial Conduct Authority is watching asset managers closely, but even it is not allowed to interfere on pricing.

The reason for so many cuts on passive offerings has come from exchange-traded funds and from the US, where we now have zero-fee investments. 

Without competitive pressures like this in the active sector, costs and real value for the investor will never come.

And there is a further problem for active managers in that a lack of transparency will in the end be incredibly damaging for the industry. Many of them are still living in a pre-RDR world, where their lives are utterly removed from that of the consumer. It’s fine when things are good – we’re in one of the longest bull markets in many investors’ lives.