At last, transparency for fund fees

published 13 February 2012

In the FTrecently, Matthew Vincent notes he's now written 88 articles about the cost to retail investors of investing in funds. I reckon I've written at least as many. The problem is twofold. First, charging is so opaque it's often all but impossible to calculate the real annual cost of holding any given fund. Second, that if you do figure it out, you discover it's far too much.

Currently investors are given a management fee (usually 0.5%-1.5%). Then they're told what the total expense ratio (TER) will be once other costs are included. But while the TER calls itself "total", it doesn't actually represent a total cost as it doesn't include the administrative costs of buying and selling shares and of stamp duty.

The upshot? When you buy a fund, you do so with only a rough idea of how much it is going to cost you to hold it. The average TER on a UK fund is currently about 1.65%. The average real total could be well over 2%.

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Good news, then, that some in the industry are beginning to see the problem. Fidelity proposes a new figure to be called the total cost of ownership (TCO). This will include the management charge, administration charges, the costs of advice and distribution and dealing costs and stamp duty.

Asset manager SCM has come up with something similar, which means that an honest fund manager now has two perfectly good ways of explaining to his clients exactly what he costs them.

After years of droning on about this, I am, like Vincent in the FT and Kathryn Cooper in The Sunday Times, absolutely thrilled. Those who aren't (most other fund providers) say it isn't necessary. When you buy something in the supermarket, they say, you don't get a breakdown of the costs of growing, storing and transporting it. You just pay the price the shop gives you.

But the difference should be obvious. At the supermarket you know the price and you pay it on the spot. You don't leave the supermarket your credit card so they can deduct more later.

But when you buy a fund without a TCO, you don't know the final price. You hand your money over while only knowing the details of three-quarters of the price. And you accept the manager taking whatever else he wants from your pot as and when.

That's very different. It's why we need to know every component of a fund's cost and what it's likely to add up to in detail and in advance. If in having transparency we expose the second part of the problem, all the better. It might, says Cooper, mean that "some true competition can be brought to bear on the industry at last".

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.