Hooray - more good news on fund management fees

While the Retail Distribution Review did away with commissions paid to independent financial advisers, the clean-up has yet to reach fund platforms. The good news is that's changing, says Merryn Somerset Webb.

This year, the Retail Distribution Review (RDR) outlawed the payment of commission from investment funds to financial advisers (IFAs). We were thrilled by that, for the simple reason that we love transparency, and we worry that alack of transparency brings in all sorts of biases.

However, if we had a gripe at the time, it was that the same rules weren't also applied to the fund platforms that most of us use when we invest (Hargreaves Lansdown, Barclays Stockbrokers, etc). Platforms have continued to quote fees for funds as management fees' levied by the fund-management companies. But they have also been able to take an undisclosed cut of those fees every year (known as trail commission').

The good news is this: the Financial Conduct Authority (FCA) "is concerned that the current system of payment is open to abuse and that it might influence how funds are promoted", as The Times coyly puts it. In other words, the higher the commission a fund pays to a platform, the more aggressively it might be promoted regardless of its quality, and all without the end investor understanding how the system works.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

So from next April, trail commissions will also be outlawed. The platforms, like independent financial advisers (IFAs), will have to disclose charges separately. We'll know how much we're paying to a fund manager, how much to a platform and how much to an IFA.

So how much are you paying now? That depends on who you are with. Some platforms, such as Alliance Trust, are already "clean". That means that you pay them what the fund charges, and a small flat fee on top.

Take the Standard Life Global Absolute Fund. According to The Times, if you buy it through Alliance you will pay a management fee of 0.75% plus a £12.50 dealing fee when you buy, and a £48 annual administration fee. If you have £10,000 in the fund, that makes your total cost 0.95% a year.

Go with TD Direct, also a leader in the provision of clean funds, and you will also pay 0.75% for the fund. It will then charge you a 0.35% management fee of its own. So that's a total of 1.1%. But if you buy the same fund via Hargreaves Lansdown, which isn't yet that into clean funds, then the management fee is quoted as 1.5%. Hargreaves Lansdown gets 0.79%. It "rebates" 0.1% a year, and "pockets" 0.69%. So your total cost ends up being more like 1.4% than 0.95%.

The point is that the various platforms are already offering a huge range of different deals. The move in 2014 will just clarify how those deals work and make it clear that some are significantly more expensive than others. Executives from the various platforms have, says the Financial Times, "made a great show of welcoming these changes". Given how many of them rely on lack of clarity to keep their profits up, it seems unlikely their joy is genuine. Ours is.