There has been much talk since the global implosion began about how hedge funds are going to have to cut their fees in the wake of their failure to deliver regular absolute returns – or, in many cases, any returns at all. That’s good. But, for most of us, what the average macro hedge fund gets up to is slightly by the by.

We’re more interested in the traditional fund management industry. And here, while there are occasional mutterings about how charges must come down, the average total expense ratio (management fees plus expenses) on a UK fund is still much too high at 1.5-1.7 per cent.

This matters: fund costs are huge wealth destroyers. £10,000 invested in a fund that grows at 7 per cent a year (chance would be a fine thing!) would be worth £14,000 in five years if you were to pay no charges on it. But pay 1 per cent and it will be worth only £13,338. Make that 2 per cent, and you are down to £12,667. That’s 10 per cent less. Over 10 years, this gap widens. With no charges, you’ll have £19,670. At 2 per cent, you’ll have £16,070. That’s £3,000 gone.

Thankfully, there has been much discussion of all this and much discounting of fees over the last decade or so. No one should really be paying upfront fees any more, for example – all the fund supermarkets discount them (I would recommend Peter Hargreaves’ book, In For a Penny, to anyone who wants to know how all this works).

However, the bad news is that – amid all this discussion about percentages and commissions – at no point has anyone questioned why we pay for fund management on a percentage basis anyway.

We don’t pay for the services of other professionals like this. We pay our accountants, our doctors and our lawyers by the hour or with a flat fee – a retainer – for services rendered. Why don’t we pay our fund managers in the same way?

It doesn’t take that much more work – or arguably any more work – to manage a large sum of money than a small sum of money. So why should it cost so much more? Why should someone with £20,000 pay double the costs of someone with £10,000?

The answer might be that the fund management industry approves of the rich subsidising the poor. But I suspect it is not. So why not charge flat rates for fund management? It would be simple to do with large institutional funds (managers can just tender competitive bids, as they do now, but with a flat fee).

It might be more complicated with retail investors but not beyond the wit of the industry to figure out.

You could, for example, just charge everyone £75 a year to be in your fund. Then, to ease the idea into the industry, you could charge a performance fee of some kind (another £50 from everyone if you do better than some benchmark for three years in a row, for example).

I’m not keen on the idea of performance fees in general, though. Ever heard of an engineer getting extra money if his bridge doesn’t fall down? Quite.

Longer-term success should be considered its own reward. Do a good job and you’ll get more clients, which will mean more fees. Do a really good job and the market might think you are justified in raising your fees. It would be just like being a good lawyer or a good medical consultant – a member of a real profession.

The benefits of all this would be massive. There’d be transparency – everyone would understand what they were paying. There’d be lower costs all around – something that generally comes hand in hand with transparency. People understand flat fees.

Percentage-based payments are confusing. Tell someone you are going to charge him a 5 per cent upfront fee and 1.5 per cent a year on his £10,000 and he might think that sounds OK. He won’t immediately note that that, over 20 years, that’ll erode a quarter of his pot. But tell him you are taking £500 right away and £150 every year after that and he’ll be off down the high street looking for a better deal before you can say “but that’s the way we’ve always done it.”

So there would be a welcome injection of real price competition into the industry. Then, as a happy side-effect, we might see less churning in UK portfolios: the tendency of the average fund manager to endlessly fiddle with their holdings, to the detriment of the average investor.

Better still, it might even focus managers’ minds on the corrupt nonsense that is the “trail commission” they pay to financial advisers. If they are getting flat fees, they aren’t going to want to pay anyone
else in percentages. So
we might finally see the back of the commission system.

I’m sure lots of you will want to write in to explain why this is the most idiotic idea you have ever heard. Please do.

Merryn Somerset Webb is editor of Money Week and previously worked as a stockbroker.

The views expressed are personal.

merryn@ft.com