How to reduce your fund management fees

There are many low-cost alternatives to expensive funds. So if you're not happy with the level of fees you're paying, take your business elsewhere. Ruth Jackson explains how to get the best value.

Fund managers have been quietly pushing up their fees ahead of an overhaul of investment charges in 2013. As a result of the Retail Distribution Review (RDR), from 2013 fund managers will have to split out the cost of advice from the cost of investment funds to make the industry's charges more transparent for investors. In 2000, the average annual management charge for active equity funds was 1.36%, says data firm Lipper in The Sunday Times. By 2009 it had risen to 1.48%, but last year alone it rose to 1.49%. "An annual charge of this size would erode almost 15% from an investor's portfolio after ten years," US passive fund provider Vanguard tells The Sunday Times.

The issue of fees is an emotive one. Fund managers deny that they are profiteering from investors, while many others see the complexity and steadily increasing nature of fees as scandalous. "Fund expenses have gone up from 1.5% to 1.7% over the past decade. The number of funds is the same and assets under management have doubled. So you have the same number of people running the same number of funds but with twice as much money in, yet the fees have gone up. That's bonkers, isn't it? With economies of scale you would expect fees to fall," says David Norman of TCF Investments in The Daily Telegraph.

Paying a fee wouldn't be so bad if you got a fantastic return a financial whiz spending 12-hour days furiously trading to quadruple your money deserves some cash for his troubles, after all. The problem is, that's not what most of us get. Actively managed funds haven't earned their fees with good returns after fees the average active unit trust in the UK All Companies sector has achieved growth of 2% a year since 2000, according to data provider Morningstar.

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It's worth seeing what annual charges you're paying on your funds, and if you aren't happy, vote with your feet. There are many low-cost alternatives to high-fee funds. Index trackers are traditionally cheap as they have low running costs. They're run by a computer and simply track a specific index the annual charge is usually between 0.25% and 1%.

Or try exchange-traded funds (ETFs), which own a portfolio of shares whose underlying assets mirror a specific index or sector these typically have an annual charge of under 0.5%. If you really want to buy an actively managed fund, buy it through a fund supermarket: these get discounts for bulk buying that are passed on to shoppers, usually in the form of reduced initial fees.

Ruth Jackson-Kirby

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance. 

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.