I must say I didn’t see it coming. But yesterday brought a highly significant development in the campaign for greater transparency in asset management. Speaking at Prime Minister’s Question Time, David Cameron expressed concern that lack of understanding of the true costs of investing is “sapping people’s enthusiasm” for saving for retirement.
He was responding to a question by the Conservative MP Tom Tugendhat, who recently discovered that the total charges on his own investment portfolio were “more than 5% a year” as a proportion of his assets, or “about triple what I had originally calculated”.
Mr Tugendhat later told the Financial Times that he had only been able to find out the real charges being levied on his investments after forcing his wealth manager to disclose them under the Freedom of Information Act.
“The total fees included many that were not advertised,” he said, “such as entry and exit charges for investment funds.”
In a strongly worded comment piece in City A.M., Mr Tugendhat described hidden fees as “a stealth tax on all our savings”. He went on:
“I’m a Conservative. That’s why I believe in free markets and competition. But what we’re seeing in the investment industry isn’t a free market. Hidden fees make proper comparison, and therefore competition, impossible.”
To those like me, and campaign groups such as ShareAction and the True and Fair Campaign, who’ve been saying much the same thing for years, Tom Tugendhat’s comments are music to our ears. Hidden fees are indeed a stealth tax, and the impact they have on the value of our investments over the long term are even bigger than Mr Tugendhat calculates.
Last year, for a video for Sensible Investing TV, I added up all the different costs associated with investing in actively managed funds in the UK — principally the cost of advice, the annual management charge, platform charges, custody and administration costs, plus transaction costs. Based on average percentages, the total cost came to 2.74% a year.
I then looked at the impact that charges of 2.74%, compounded over 40 years, would have on an investment of £100,000. I assumed an annualised return of 8% before charges which, after charges of 2.74%, nets down to 5.26%.
40 years on, that £100,000 you invested would, before charges, be worth £2,172,452, and after charges a mere £777,203. So your actual gain would be just £677,203. The effect of your total charges would have reduced your potential return by a colossal £1,395,249. In other words, more than two thirds of your potential gains have been lost.
If it’s true that Tom Tugendhat was indeed paying more than 5% a year — that is an astronomical figure — the likelihood is that all (or nearly all) of his returns were being wiped out by fees and charges.
This is an outrageous situation. Here we have an industry that is hugely profitable and whose major players earn Premier League salaries. And yet, on aggregate, it extracts value from the investment process. No wonder fund management companies are so keen to make it almost impossible for consumers to calculate exactly how much they’re paying.
At least now the issue of fee transparency is finally on the political agenda, both in the UK and in the US, where President Obama has personally spoken out against brokerage firms who push high-fee mutual funds and other expensive investment products because they earn more money by doing so.
In the US, Wall Street lobbied hard against the Administration’s plans to tackle conflicted investment advice, and when details of the so-called Fiduciary Rule were announced earlier this month, it was clear that the industry had managed to force concessions.
If indeed David Cameron is serious about clamping down on hidden fund fees, we can expect fierce lobbying here too. It’s not just fund managers who stand to lose from lower fees, but a whole support industry that includes platforms, brokers, researchers and consultants, as well as dozens of PR and advertising firms. There may well be a price to pay for Mr Cameron’s party too; as a group, asset managers are by far the biggest donors to Conservative coffers.
But, for the sake of investors, it’s a battle he must fight — and win.
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