Opaque fund fees
It’s more expensive to be an investor in the UK than it is in the US, according to senior executives in the fund management sector.
Bloomberg is reporting that executives at Fidelity Worldwide Investment, Fundsmith LLP and SCM Private LLP. U.K are saying hidden charges make it tough for investors to compare products. They are also hurting competition.
These ‘hidden’ fees on investing can add as much as £18.5bn to the cost of investing each year. They contribute towards making collective investment funds in the UK nearly twice as expensive as those in the US.
According to the article, the average UK fund charges 2.21% each year whilst the average US fund charges 1.04% each year.
In a low return environment, it is important to consider the cost of investing and the impact high charges have on net returns.
Passive or tracker funds are only part of the solution.
Because the management charges on these tend not to include platform costs or remuneration for advisers, it is important not to compare their costs on a like-for-like basis with actively managed funds.
In the US, passive funds are more popular than actively managed funds. This fact could be contributing towards a distortion in the figures comparing the cost of investing in the UK and US.
Whenever you choose a passive or active fund it is important to consider not only the cost of investing but also the value you get for your management fees.
From a typical 1.5% annual management charge, 0.25% goes towards the cost of platform administration and 0.5% towards the cost of advice. If you invest in a passive fund, you need to pay separately for these two things.
Whilst referred to as ‘hidden’ charges, all of the charges incurred by investors are required by the financial services regulator to be robustly disclosed. In any case, the net return achieved by the investor should always been entirely transparent.
When considering the cost of investing and making comparisons with the US, it is important to compare on an equivalent basis.
Comparing a market which relies on passive funds where investors typically pay separate fees for advice with one which still favours actively managed funds and uses part of fund management fees to offset the cost of administration and advice does not result in a fair comparison.
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