A new drive for clear costs

It is now one year, six months and 20 days since I drafted the original FT Fund Fees Manifesto

It is now one year, six months and 20 days since I drafted the original FT Fund Fees Manifesto, calling for full disclosure of all retail fund charges (Money, November 14/15, 2009). In that time, hundreds of readers have written in support, two fund consultants have considered adopting the proposals and one industry body has “encouraged” its members to publish their costs more clearly.

But not a single UK fund manager has moved to full disclosure.

So, the annual management charge (AMC) you are quoted still excludes costs such as administration, audit fees and custody charges, while the so-called total expense ratio (TER) excludes dealing costs and stamp duty – all of which are deducted from your investment. Not that you’d know, or ever be told.

Now, however, one of the UK’s largest fund managers, Fidelity, has suggested a new measure: “Total Cost of Ownership”. It is not perfect. Although it discloses the extra costs of buying funds via an online platform or broker, it does not give an indication of how much portfolio turnover raises dealing costs. Also, its sample calculations only cover passive FTSE tracker funds, which show Fidelity’s own fund in an unsurprisingly good light (although it could be applied to active funds).

It is a start, though. That’s why I’ve decided to let Fidelity’s UK managing director, Gary Shaughnessy, explain his thinking (below) – and invite your reaction to his proposals by e-mail, or in the comment box at the end of this web page.


The proposal

Fees reduce the value of your investments, so everyone should be clear about what they are paying and what they are getting in return.

It’s like deciding whether to fly with a flagship airline or its no-frills rival. There’s more to the comparison than the eye-catching price in the advert. If you’ve been stung by an online check-in fee, an extra charge for using a credit card or add-on costs for baggage, you know that what matters is the “total cost of travel”.

It’s the same for car buyers. Tempted by the advertised price and the 0 per cent interest deal? But have you factored in road tax, registration and “optional extras” that come as standard with another manufacturer’s car? It’s the total “on the road” cost that matters, not the sticker price.

Buying an investment fund is no different.

Investors need to know: what’s included in the headline charge; whether platform fees, advice costs or other charges are added on top; whether there is a minimum investment; and whether this is the best way of buying the fund, given personal circumstances and tax status.

But our analysis shows that even among “low-cost” trackers, there is confusion about the “on the road” cost. So we have calculated a new measure: the total cost of ownership (TCO).

This is frequently higher than the quoted AMC and TER, for a number of reasons: some very low-cost funds – such as Vanguard’s UK index tracker – set high minimum investment levels if you wish to buy the fund direct, forcing investors to buy via a platform, which will levy additional charges.

We have therefore come up with a way of disclosing the overall cost of investing the full individual savings account (Isa) allowance of £10,680 in a fund, and holding it for 10 years, assuming annual growth of 7 per cent (see table above).

Our projections for fund value, total charges and reduction in yield have been taken from the independent Capita Financial Software “Synaptic Comparator” tool (with the exception of TD Waterhouse), using data from the funds’ own factsheets and the relevant platforms.

Our conclusion is that investors need full disclosure of the total “on the road” cost of buying and owning a fund. An AMC figure is just one element of this total and, on its own, is not enough – the cost of advice, platform fees and other charges must also be spelt out, to put the investor in the driving seat.

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