The fund-management industry needs to get a grip

The fund-management industry should start charging for its products in the same way as everybody else does, says Merryn Somerset Webb.

What are the most weasel of all weasel phrases in the financial industry? My call would be "this is the industry standard". Roughly translated, it means "we know this is both unpleasantly greedy and mildly dishonest but everyone else does it too so yah boo sucks to you".

A perfect demonstration of this appeared in The Sunday Times this week in yet another story about the many innovative ways we're being ripped off by the fund-management industry. This one was about administration charges. These are not considered by fund managers to be part of the expense of managing a fund, and are thus not included in the management fee. They are instead something completely different. In some cases £93,000 a day (0.15% of assets under management or £34m a year) different. That's the sum The Sunday Times says M&G's Optimal Income Fund charged its investors for administration last year. It covers not very expensive sounding stuff, such as "record keeping" and sending progress reports. But the firm is also clear that if the administration doesn't cost £93,000 a day how could it? "any surplus from this charge will be retained by M&G" on top of its already rapacious management fee of 1.25% a year. Funds of this size the Optimal Fund has £18bn under management should have much lower charges. Stunning, isn't it?

Some readers might think that this kind of thing doesn't matter. After all, it's entirely possible for investors to find out roughly how much their funds cost them to own by looking at the ongoing charges figure (OCF), which adds up management fees and most of the other charges the endlessly creative staff in the sector dream up.

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We disagree. The OCF doesn't really clarify things for the inquisitive. What's the difference between administration and operational costs? How come some managers can administrate so much more cheaply than others? Why are administration costs different to management costs? And why can't the industry figure out a way to include one of the biggest costs of all: transaction fees?

It really is time for the fund-management industry to get a grip on its behaviour and start charging for its product in the same way as almost all other product providers do: present one simple, all-inclusive price, one that has to cover every cost of managing the fund from transaction costs (this might even encourage them to trade less!) and administration expenses to paying the fund manager.

This would be simple and transparent. It would mean that we could actually compare prices properly something that might even push them down. And, perhaps most importantly, it would be honest. I don't think it will happen anytime soon. Why? Because as Jupiter told The Sunday Times when questioned about their high administration charges: "this is the industry standard".

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.