When it comes to investing your money, charges are an important factor to consider.
It obviously costs money to invest money; you need to pay for fund management, administration and advice.
These charges reduce the total return you get from your investments, so lower charges are preferable in as much as they create less of a drag on investment performance.
Of course a sole focus on charges ignores all of the other factors; factors which can be equally as or even more important than charges.
Various regulators have been talking a lot about charges today.
We have seen the Financial Conduct Authority (FCA) call for greater transparency in the fund management sector, in order to boost its reputation.
The FCA has a bee in its bonnet about the use of dealing commission to cover the cost of third party research. If fund groups are forced to absorb these costs themselves, it has been estimated it will cost them (read, the end investor) £3bn a year.
We have also heard today that pension charges could be capped at 0.75% to 1% a year, in what the government has described as a “full frontal assault” on pension fees.
The government consultation will explore three possible options for pensions; a 1% charge cap, 0.75% charge cap or a “comply or explain” cap, allowing providers to increase their maximum fees from 0.75% to 1% if they can satisfy regulators that their scheme needs to charge more.
All of this focus on charges and ensuring the lowest possible cost should be good news for investors, but it probably is not.
Concentrating solely on cost ignores the important matter of value. Value is what matters, not price.
With pensions, there is a big risk that existing cheaper pension schemes will ‘level up’ their current charges to the newly introduced charging cap.
And then of course there is all of the uncertainty that yet another set of changes to pensions would inevitably cause.
What pension savers need is a stable and consistent pensions market. Fair, yes, but with a set of rules that remains the same for decades at a time.
As things stand, we seem to have government interference on pensions whenever they feel like a tinker. This is massively damaging to confidence in pensions. Surely the government must see this?
Rather than focus solely on charges, what about some positive messages from the government and regulators on the importance of making a suitable level of contributions and regularly reviewing investment funds to ensure suitability?
What about encouraging professional independent financial advice, to help investors make the most of their fund and scheme choices?
What about, rather than knock the investment and pensions sector, the government allows competitive pressures to kick in and actually promotes the vital importance of saving for the future, rather than relying on the state?
It’s nice to think that one day we might have a government which supports long-term savings, stops tinkering with the rules and focuses its regulatory attention on truly damaging financial issues, such as payday loans.
For now, what we have is a government which thinks it is all about charges. How wrong they are.
