It's rare to find that prices for the best products fall, while the costs of the worst go up but in the topsy-turvy world of funds, this seems to be the case. Investment fund research group Lipper Fitzrovia has found that index funds (which simply track the performance of a given market or sector) are becoming cheaper, with the total expense ratio (TER) on the average fund falling to 0.94% a year in 2006 from 1.12% in 2001. The drop has been driven by rising competition as smart investors flock to the cheapest index funds providers who have cut costs "have obtained higher fund inflows as a result", writes Jonathan Davis in The Independent.
On the other hand, the cost of actively managed funds is on the rise. There has been a steady increase in management fees over the past five years, from 1.21% to 1.39%. And there's no drive to cut costs. "In fact," as Davis says, "the main focus of many fund providers is to find ways to raise their charges", with innovations' such as performance fees and more complicated products. Investors should also be aware that more than half (52%) of the annual fee on a typical managed fund is due to commission payments made to independent financial advisers (IFAs). As we've pointed out in MoneyWeek before, if IFAs really were independent, commission charges would be falling because they would have no impact on an IFAs' recommendation. That they are rising shows they work and that some choose funds on the basis of how much money they stand to make, not their suitability for clients.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
‘Inheritance tax insurance’ enquiries are soaring – but is it worth it?Premiums for whole of life insurance can run to £5,000 a month to cover a £300,000 inheritance tax bill, with policies costing more the older you take them out.
-
MPs warn over Lifetime ISAs which could leave savers out of pocketThe Treasury Committee has highlighted confusion around the Lifetime ISA withdrawal charge, which risks consumers losing “a significant part of their savings”
