Guess the fund charge

Half a century ago, fund managers charged a fraction of what they do today, says Merryn Somerset Webb. So, what's changed?

I spoke to a retired partner from one of Britain's big investment firms a few weeks ago. He told me what the average fund charges there were for investors back when he started work. I was stunned.

I've been asking people to guess the number he gave me ever since. No one has got it right. Most have been out by a factor of at least ten.

Have your own guess before you read on. Ready? Here's the answer: 0.08%. Not 0.80%. But 0.08%. Or as they would say in the industry, eight basis points.

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Today, management fees of 1% (12.5 times more) are entirely standard. Total expense ratios of over 1.5% barely raise an eyebrow in the City.

If you ask any of the City's eyebrow owners about these numbers, they will tell you that times have changed. There are platform fees. There is a huge amount of infrastructure involved (travelling to look at stuff, research stuff, modelling stuff) and, of course, there is regulation.

This is all completely true. And it is probably worth another few basis points. Let's add in 15 for distribution and ten for regulation (write any comments below about how this is wildly optimistic, grossly unfair etc). That gets us to 0.33%.

Let's round it up to 0.50% on the basis that I suspect that even 50-odd years ago, 0.08% was considered extremely cheap. But there's still a big gap there.

How come fund management today costs double what it did 50-odd years ago? I think we all know the answer to that. Fund managers haven't always been well paid.

Back then, said my retired friend, they were considered to be of slightly lower worth than a mid-ranking accountant and were paid accordingly.

The idea that it is reasonable for someone whose job is to fiddle around buying and selling stocks to take home millions a year hadn't yet wormed its way into industry tradition.

Even post the Retail Distribution Review (which banned commission, which was one of the things keeping final prices high), and after the supposedly disruptive arrival of cheap tracker funds, there are still hordes of managers out there charging well over 1%.

They say "that is what it costs". However, they won't tell you that the it' in question is mostly what they cost.

This matters: fund costs are huge wealth destroyers: £10,000 invested in a fund that grows at 7% a year would be worth £19,670 in ten years if you were to pay no charges on it. But pay 2% and it will be worth only £16,070. That's over £3,000 gone.

This isn't news to most MoneyWeek readers, I know, but I don't think we can remind ourselves often enough of the long-term cost to our investments of overpaying other people to invest for us.

So, either make sure you buy well-priced funds (the Vanguard LifeStrategy funds charge from 0.29%-0.33%), or pick your own stocks.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.