There’s been much written lately about falls in fund management charges. Of course, any reduction in the cost of investing is to be welcomed. But are we being given the whole story? Gina Miller is the founder of the London-based True and Fair Campaign, which is lobbying for more transparency in the investment industry and fairer charges for the consumer. She’s been telling us the industry continues to engage in “smoke and mirrors”, and that in many cases fees are actually going up.
SITV: Why are charges such an important consideration for investors?
Gina Miller: The percentages sound small but over the long term, because of compounding, they add up. Obviously fund managers need to be paid for their services but fees have to be fair. The majority of the returns made, especially as we encounter a low-return environment, should go back to the people whose money they’re looking after. As it is, the fund manager ends up earning more in fees than the investor will get back in their pocket. That’s the wrong way around.
SITV: What are the main charges that investors can expect to pay?
Gina Miller: The fund management industry is supposed to publish something called the on-going charge. That was under an EU directive that came in in 2012. Most companies still only publish the annual management charge. Outside of the AMC, there can be between 11 and 13 layers of additional costs. For example you’ve got jurisdiction fees, bid offer spread, administration fees, taxes and stamp duty. In a way, it doesn't really matter what all these charges are. The individual investor would have to become a detective to find out. It should be the industry doing the work to put all that in an understandable number - a ticket price. When you buy a car, you don't expect to see a list of how much the wheels cost or the engine and so on. What you expect to see is how much the car is going to cost you.
SITV: We keep reading that fund management charges are finally coming down. Is that right?
Gina Miller: What’s happening in the industry is that we’ve had unbundling of charges, so you can now see each layer of cost. The fund manager fee appears to have come down, but the overall cost of investing hasn’t. It’s still 60% more expensive for people in the UK to invest than for those in the US. 73% of the industry still charges exactly the same fees and in any other industry you can argue that’s a cartel. The other thing that’s happened, is that each individual part of the chain is concentrating on its own fees. So you’ve got fund managers saying how fees are coming down when actually they could come down even further. Nor are they including all the fees and charges, so you don't know that the true cost, instead of that clean 0.75%, say, is probably coming closer to 1.5%. You’ve also got the platform fee and the adviser fee. So you need to know all those layers to work out what the cost is. When you add those layers together, fees and charges in some cases have actually gone up.
SITV: The announcement that Neil Woodford is charging 0.75% for his new fund has been welcomed as good news for investors. What’s your opinion?
Gina Miller: It’s encouraging to see that the on-going charge and the annual management charge will be absorbing the administrative costs, and it just begs the question, why can’t everybody else do that? But I find it disappointing that they’re not going to give the total cost of investing. The other thing is that the fund is not going to be available direct, so investors are still going to have the platform charge on top. The third thing I think is disappointing is the fact that they’ve insisted on doing the old marketing trick of giving an offer period. Why do you have to have an offer period? There is absolutely no sense in it other than giving the customer the feeling that if they don't get in at this point in time, they would miss out. It’s a marketing gimmick.
SITV: What are the main things that fund managers spend the money they make from investors on?
Gina Miller: It’s salaries, staff, infrastructure, administration - all of it, quite outdated and inefficient. So there are lots of layers of inefficiency in the industry. Then there’s advertising, of course. You would have thought a lot of it is spent on research, but that’s actually not true. The research is quite often paid for separately by the investor. And there is actually, from all evidence that we can see, very little research happening. There was a study last year that found the majority of research files weren't even opened by fund managers, which I find quite extraordinary. So one has to ask the fundamental question, what is the annual management charge for?
SITV: What sort of profit margins are the big fund managers achieving?
Gina Miller: The average UK small-to-medium-size businesses is making between 9 and 15% profit. The average UK fund management business is making 30% profit. Those figures speak for themselves. They are growing fat and rich while the consumer is losing out. The very people who are being prudent in saving and investing are not the ones who are retiring with a comfortable pot. It’s the fund managers who are becoming millionaires and billionaires.
SITV: To what extent do fund managers realise that they need to clean up their act and offer consumers a better deal?
Gina Miller: We had a very interesting meeting with one of the big accounting firms, which said our latest ‘True and Fair’ campaign report, called Legalised Looting, has caused a huge stir with their client base because they feel that the tide is turning against them. I was encouraged by that. So my next question was, how was their model going to evolve? And the answer that came back was, Oh no, they’re not going to do anything about it. They’re just going to wait until it’s mandatory because we know at some stage it will be. That completely sums up the picture. People will carry on making profits for as long as possible. The industry association is making noises and fantastic rhetoric about changing the way fees and charges are both calculated and displayed, but we can’t see any evidence that that is actually moving forward.
SITV: What are the regulators doing to promote fair transparent charges?
Gina Miller: The overarching principle for the regulator, the FCA, is that charges are clear, fair and not misleading, but the industry scores a fail in all three of those. The FSA, the previous incarnation of the FCA, in its own report in the year 2000, found that on average, 50% of all fees and charges were hidden. Here we are, 14 years later, and nothing has changed. The FCA hasn’t banned commissions outright: they’ve said they’ll be allowed if they are substantive, whatever that means. They’re allowing these practices to carry on. They need to mandate that the industry simply has to display all its fees and charges in an understandable format. We need a uniform format across the industry.
SITV: If this issue is as scandalous as you say it is, why isn't there more discussion of it in the media?
Gina Miller: You have to remember that finance is pretty boring. I think for the average person on the street, their view is that we’ve got the industry there, they’re professionals, they’re doing the job, I trust what they have been doing. And understandably, if you set yourself out as a profession, you would expect professional standards. To then ask the general public to accept that this entire industry has been ripping them off is quite a mind shift. So you need to do it in a way that is quite gentle. The problem is, it’s still sitting in the financial pages of newspapers or on websites. It needs to become a wider consumer debate. Secondly, you’ve got the commercial reality in many of these media outlets that these fund management businesses spend a huge amount on advertising. So why would they really want to create a huge debate around something that would impact negatively on their bottom-line? And thirdly, the industry is cloaked with convoluted language. So people are put off going to the industry and asking too many questions because they feel that they don't understand it. So financial education is a fundamental part of all of this. We have to start talking about financial services, about money, about pensions and investments in a language that people understand.
SITV: Finally, if you could change one thing about investment charges, what would it be?
Gina Miller: I would like investors to have the ability to see a ticket price as they would get in any other industry. One number - a total cost of investing that includes all costs, implicit and explicit. And all of our research has shown that people want to see it in pounds and pence. They don’t really understand the impact when it’s in percentages.