Millions of people with money invested in funds and pensions are being failed by an industry that is charging excessive, unfair and often hidden charges that total billions of pounds, according to the Financial Services Consumer Panel (FSCP).
The body, which advices the Financial Conduct Authority, is unhappy that most pension and investment funds display the annual management charge as the cost of the investment but that can make up as little as a quarter of the actual cost. That is because many of the charges are taken directly from the funds so remain hidden from investors.
The panel is calling for clearer breakdowns of charges so that investors can make more informed decisions about where they put their money.
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"It is completely unacceptable that consumers do now know what firms are charging them to manage money on their behalf and cannot compare them with their rivals," the panel told The Times.
According to research by wealth manager SCM Private, the real cost of hidden charges is up to £19bn a year across pension and investment funds. Charges can make a huge difference to the value of your savings – just a 1 per cent annual management charge adds up to 24 per cent of a pension pot over a working lifetime, according to the Department for Work and Pensions.
What are these hidden charges?
Most fund groups quote the annual management charge (typically around 0.75 per cent) and an ongoing charge that covers costs such as custody and audit fees (pushing the total fee up to 0.85 per cent on average). But, the FSCP state that there are many more charges being levied on most funds.
"In particular, it argues the ongoing charge takes no account of the transaction costs, such as broker's commission and stamp duty, which managers incur when they buy and sell shares in their portfolio," says Mark Atherton in The Times.
Another hidden cost is the 'spread' – the difference between the buying and selling price of a stock. This can typically add between 0.27 per cent and 0.4 per cent to the total fund cost.
What can be done?
The FSCP is calling for a new annual management charge to be introduced that covers everything from transaction costs to the current management fee.
"Fund management firms could be required to quote a single and comprehensive annual charge that included estimates of 'forward costs' such as transaction charges," says Rupert Jones in The Guardian , following an interview with a member of the FSCP.
"All the other costs that are currently deducted directly from the fund would be borne by the firm, thereby enabling consumers to compare different firms' charges, and acting as a 'powerful incentive' to improve efficiency."
Panel member Teresa Fritz said: "If consumers really knew the true cost of investment management, it might drive some to take their money out and put it into savings accounts."
