A setback in the fees battle

The battle for increased transparency in fund fees suffered a blow earlier this month with the exit of Daniel Godfrey from the Investment Association, the fund managers' trade body. Godfrey had tried to push through reforms requiring fund providers to be more upfront about their charges, but was toppled by a "no confidence" vote from some of the biggest fund groups in the industry.

Despite his early exit, Godfrey managed to bring in a requirement for pension and Isa providers to tell people exactly how much money has been removed from funds in charges. However, this information can be buried in a fund's annual report, with the understanding that investors will do their own calculations. For most people this information is "about as useful as an umbrella in a hurricane", says Gina Miller of wealth manager SCM Private.

The result of this lack of transparency is that many investors are paying far more than the headline management fees on funds without realising it. The Financial Services Consumer Panel estimates we are unaware of up to 75% of the charges imposed on our money.

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For example, on top of the expected fees (an annual charge of around 0.75% and a broker charge of an average 0.35%), you could also be paying for trading fees, "other costs of buying and selling investments" (the difference between buying and selling prices), administrative and marketing costs and, finally, performance fees, says Kyle Caldwell in The Daily Telegraph. In some cases, costs could add up to around 4% per year "once all add-on fees were taken into account", says David Norman, of asset manager TCF Investment.

Obviously, fund managers can't make exact predictions of variable costs, such as trading fees. But it should at least be simple for investors to find out the types of charges they will be paying, without having to pore over small print or decipher industry jargon. If you can't easily see how much it will cost to invest in one fund compared to another, it becomes harder to spot the best deal.

One sign of progress is that the Financial Conduct Authority (FCA), the investment industry's regulator, intends to carry out a "market study" on asset managers and the charges they levy. This could lead to the kind of change that Godfrey was pushing for, but it's likely to be a long and drawn-out process. In the meantime, we recommend that investors favour passive funds in most circumstances. These tend to be cheaper and simpler, and also tend to outperform the average comparable active fund most of the time.