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.
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. 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.
But when this all ends, and it will, what will investors who have seen their fortunes plummet suddenly feel?
If investors are not taught about the value of the service they are being provided, then there is going to be real anger.
The direction of travel is towards transparency. Fund managers would do well to speed reform while the going is good, because when the markets turn sour, it will be too late for excuses.
Expect very little from the Autumn Budget
“As Britain finds its place in the world, away from the shackles of Europe, we need to build an economy that is robust and fair. An economy where aspiration and entrepreneurial spirit is rewarded. But to do this we need to make some tough decisions…”
These, I predict, will be the words of the chancellor next April, when the nation holds an emergency post-Brexit Budget.
I have to write this column a week before his current Budget – you are reading it a couple of days after. I have no idea what will be in it. I ignore all speculation, particularly on pensions.
But I am expecting very little this time round. Brexit will present the opportunity Philip Hammond needs to overhaul our economy. And that is when we will see some of the most radical policies in a generation.
Rate cuts pay off for HSBC
One unintended consequence of ring-fencing of the banks is a more competitive mortgage market. HSBC, which used to ignore brokers totally, now has distribution to rival firms that have been doing it for years.
As well as doing volume, HSBC is able to cut rates in an instant, all because it has vast swathes of current account cash sitting there to fall back on and now needs to use. What that says about our current account market, though, is another thing entirely.
James Coney is money editor of The Times on Sunday
