The end of fund management entry fees?

Many fund managers have ditched entry fees for retail investors. But not all have, says Sarah Moore, so watch out.

The asset management industry has increasingly come under attack in recent years for high fees and hidden charges. One area currently being scrutinised by the industry watchdog the Financial Conduct Authority (FCA) is the appropriateness of charging retail investors "entry fees". These fees, also known as "initial charges", are supposed to cover the cost of setting up your investment (ie, marketing and administration), and can range from 2% to a fairly staggering 10% of the money being invested.

Many fund managers have already decided not to charge an entry fee, or to waive it for customers buying directly via brokers such as Hargreaves Lansdown and TD Direct, or via a financial adviser. But this is not true of all companies, meaning those buying a fund straight from the asset manager are often hit with substantial charges before they've even made any money on their investment.

"This kind of differential charging is not treating investors fairly," Gary Mairs of investment house TCF told the Financial Times. "It is taking advantage of the naivety of investors who are coming directly. The regulator needs to ensure companies are not using their information advantage against relatively unsophisticated investors. That is an abuse of their position."

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Jupiter Asset Management's 2015 annual report attributes £14m of its £329m revenues to "net initial charges", says Madison Marriage in the FT, although Jupiter emphasises that this relates to six years' worth of transactions. Other companies that levy an initial charge on some funds include Schroders, Santander and Standard Life. The latter maintains that this is merely to "discourage" retail investors from buying certain funds that have reached capacity, or which are more suited to institutions.

Mairs suggests there are better ways to deter investors from putting money into a certain fund: "simply stop taking new money". He believes the only way to get rid of entry fees is for the FCA to intervene. "All companies will take a long time to shift to doing the right thing if they can get away with it." The FCA is expected to publish initial findings of its investigation into the asset management sector this summer.

Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.