Rules meant to create greater transparency in the commission structure have resulted in a minefield of confusion
Working out the cost of investing in funds such as unit trusts is a minefield. On 31 December the main financial regulator brought in new rules on the fees that investors are charged, but, ironically, this has made matters more confusing, it was claimed this week.
The aim of this shake-up, known as the retail distribution review (RDR), is to make the true cost of investing clearer. It means financial advisers will have to charge upfront fees to their customers rather than receive commission from companies supplying financial products. The aim is that consumers will see clearly the cost of advice which may previously have appeared to be free since the charges were part of the commission paid to the adviser.
But because it is being phased in over three years, brokers and advisers are using two methods: the old one, which includes the provider and investment “platform” fees, or the new one, which strips these out, leaving only the fund manager’s charges. Investment platforms allow you to buy, sell and manage all your investments in one place online.
Nick Curry at online investment firm rplan says: “RDR is a great attempt at clearing up some of the confusion around the charges in the industry. It’s unfortunate that its introduction is temporarily creating so much confusion around the cost of investing – the very problem which it was supposed to solve.”
It was thought that costs would come down once all the charges were explicit, but Gina Miller of SCM Private, who is spearheading the True & Fair Campaign to make the industry come clean about charges, claims: “It’s more expensive since RDR was introduced than before. The costs are incomplete. There should be one ticket price that investors can trust. Some fees are absolutely outrageous.”
Where your money goes
While some charges are clearly stated upfront, others are hidden when you invest in unit trusts or open-ended investment companies (Oeics).
• Initial charge. This is typically 5%, but is easy to avoid. Discount brokers and advisers such as Bestinvest, Cavendish Online, Chelsea Financial Services, rplan and Hargreaves Lansdown, refund you most, if not all, of this charge when you invest. This would save you £633 if you put in your full Isa allowance of £11,520, and would increase your investment by £2,000 over 10 years.
• Annual management charge (AMC). This is often around 1.5%, and again you may get a small proportion of it back from discount providers.
• Total expense ratio (TER). This includes the AMC, administration costs, other charges and the exit fee if there is one. It may include the provider and platform fees or not, depending on whether your provider has already moved to the new method, where these costs are removed.
• Turnover. There are costs every time your fund manager buys and sells shares; how much this will eat into your returns depends on how often it’s done. It’s possible for the entire portfolio to be changed in a year. Funds do not have to supply the turnover rate, and Miller says it is often buried in a 100-page accounts report rather than being in the key facts.
• Performance fees. Some funds charge these if the fund does particularly well against a benchmark or target figure set at the start. If it beats this, it may well claw back between 10% and 20% of the profits – rplan says the average is 15.8%.
“This is absolutely outrageous,” says Miller. “You’re paying them to do a job, and if they do it well they take more.” And, of course, if you use an adviser to guide you in your investment decisions, you will pay either a flat fee or a percentage of the amount you invest.
Investment trusts and exchange traded funds (ETFs) tend to be cheaper than unit trusts and Oeics, but they are not marketed as heavily as they don’t pay commission to the seller.
• Investment trusts quote an ongoing charge which is similar to the TER. The typical equity fund charges 1.21%, according to the Association of Investment Companies (AIC), with around a third charging less than 1%. Again, this does not include information on how high the turnover is, or performance fees. If there is a performance fee, it is displayed on the AIC website.
Buying an investment trust is like buying shares, so there will also be a stockbroker charge of 0.5%, and the margin between the buying and selling price.
• Exchange traded funds simply track an index such as the FTSE 100. Because you are not paying for a manager to make decisions for you, they tend to charge less than 1%. Again, they are like buying shares, so you will have broker fees and the buy-sell spread to take into account.
The best buys
When choosing a provider to buy your funds from, be aware that this can make a significant difference to how much you pay. It all depends on its fees and how much it pays for the platform to administer the purchase, as well as the rebates it pays. In some cases, such as Fidelity and Hargreaves Lansdown, they are both the provider and the platform.
Research by rplan shows that you could be charged less than £8,000 or nearly £16,000 if you invested your annual Isa allowance of £11,520 over 10 years. Cavendish Online came out the cheapest at £7,679, followed by ICICI Bank at £8,240 and rplan at £8,400. The typical discount broker worked out at £11,135 and the typical adviser cost £15,739.
The True & Fair Campaign has a cost calculator at trueandfaircalculator.com so you can check what you are paying.
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