Concerns on high fees

Fund groups are coming under pressure to cut the fees they charge investors, amid concerns that high fees can impact performance over the long term.

This week, two low-cost fund managers came under fire for failing to disclose to investors all the underlying fees in their investment products.

Seven Investment Management (7IM) and Evercore Pan Asset told Citywire, the news website, that they did not disclose some annual fees for exchange traded funds that were held in some of their investment portfolios. Only the overall charge – the total expense ratio (TER) – for the portfolio was quoted.

“The TER of the underlying investments should be added to the TER of a fund of funds,” said David Norman of TCF Investment, the low-cost fund manager. He said that failure to disclose all charges “has the potential to mislead advisers and investors about the costs they are paying”.

Justin Urquhart Stewart of 7IM said that the question of how to display charges was an “industry-wide issue” but the Financial Services Authority did not require all the underlying charges in a fund to be reported. He said 7IM tried to bring down the costs of its funds by buying institutional share classes, that tend to be cheaper.

Fund managers have been facing increasing competition from low-cost rivals. Vanguard, the US fund manager, entered the UK market last summer with fees as low as 0.15 per cent a year. Other low-cost managers are now lowering their fees to stay competitive.

The Munro Fund said this week it was changing its annual management charge from 0.75 per cent to 0.5 per cent following pressure from fee-based financial planners.

SCM Private, the low-cost fund manager, estimates that hidden fees can have a big impact on performance, with 2 per cent of extra costs a year creating a loss of more than 20 per cent of capital over 10 years.