You wouldn't buy a house without checking the solicitor's charges, so why should it be any different when you buy a fund? Yet frequently, it isn't at all clear how the charges for the typical unit trust are broken down between the parties involved in the buying and selling process. Fortunately, the rules on this are changing in your favour. Here's how and what to look out for in the meantime.
The Financial Conduct Authority's Retail Distribution Review (RDR) has already shed a lot of light on just how much financial advice truly costs by banning financial advisers from accepting commission for recommending particular funds. This transparency is set to be extended to the brokers (such as Hargreaves Lansdown, the biggest seller of funds to private investors), who typically execute a fund deal on your behalf. From 2014 they will be forced to disclose how much they can earn from these transactions, says Richard Dyson in The Daily Telegraph.
In some cases, these middlemen rake in nearly as much as the fund manager who actually does the stock-picking. For example, of the 1.3% cost of buying the Invesco Perpetual High Income fund via Barclays Stockbrokers, says the paper, 0.55% goes to Barclays and 0.75% to the fund manager.
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In fairness, some brokers, such as TD Direct Investing and Charles Stanley Direct, already list their charges. Others, including Hargreaves Lansdown and Fidelity (FundsNetwork), have yet to disclose them all as their systems are still being adapted.
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Unfortunately, greater transparency will not necessarily make picking a broker much easier than it is now. That's because different brokers will still continue to charge different amounts to sell the same product from a given fund group. Hargreaves Lansdown, for example, with a client base of 470,000, can command discounts from some fund providers that other brokers won't easily be able to match.
However, on some trades it will be beaten by the likes of Charles Stanley. Take the Invesco Perpetual High Income fund. It costs 1.5% to own through Fidelity FundsNetwork, 1.25% through Hargreaves Lansdown, and just 1% if bought via Charles Stanley.
So while we welcome any move to make better information on charges more freely available to private investors, our advice won't be changing in a hurry: shop around if you want to get the cheapest deal on a new fund and don't automatically buy through your existing broker if there is a better deal elsewhere.
