Mark Dampier: It's time the FSA made fund charges clearer

The Analyst

I received a letter from a reader concerning fund charges recently, and with much publicity on the subject at the moment it seems an opportune time to air my own views. Fees and charges are of course important. Over time they can make a huge difference to your investment returns, so I make no apologies to devoting this week's column to them, as well as the overall logistics of managing your investments efficiently.

Starting with the basics, OEIC (open-ended investment companies) and unit trust funds are the most popular means for private investors to access the markets. They come with fees of up to 5 per cent, though few, if any, investors pay the full charge. If you do, stop! You must be going direct to the fund management group, which is usually the most expensive way to invest.

Going through an adviser, particularly an "execution-only" broker, usually means the initial fee is discounted substantially, sometimes to zero. In addition, some brokers will also refund some renewal commission providing savings on the annual fund management costs too.

Most private investors buy through a "platform" or fund "supermarket", either on their own or through an adviser, to take advantage of these savings. A platform acts like a backroom administration system, enabling you to directly buy and sell funds quickly and easily online, by telephone or by post. Platforms enable investors to aggregate all sorts of investments from different providers in one, easily accessible place – a great benefit if you are like me and want to keep the financial correspondence you receive to a minimum.

An American general once said, "amateurs talk tactics, professionals talk logistics". It seems to be true of the investment industry too.

Plenty of column inches are dedicated to investment ideas and portfolio construction, but precious little on how to manage it all efficiently.

What is the point of an investment master plan if you can't execute it? Fund platforms offer this efficiency: 24-hour, online access to your SIPP, ISA and share portfolio with minimal paperwork. Rather than being inundated with reams of information from a myriad of providers, you can have one, consolidated document including a tax statement – a vast improvement on 20 years ago! Most importantly, platform services generally save the customer money due to the discounts mentioned above.

The information provided by platform operators also allows the customer to compare the charges and performance of various funds. However, a debate currently rages on whether the annual fees deducted from unit trust or OEIC funds are being properly reported. The figure investors most often see is the annual management charge (AMC). This is the charge the management group takes for running the fund. Yet it excludes various items such as legal costs. So the alternative, more comprehensive figure is the total expense ratio or TER, soon to be known as the "ongoing charge". This includes the various other costs incurred by the fund so is a better measure than the AMC. Dealing costs, however, are still excluded. Some argue they shouldn't be, but they can change drastically over time, so perhaps it would make the figure less useful.

A more important point is how fund administration and registration costs are being taken. Increasingly they are being expressed as a fixed percentage of the fund. It may sound a small point, but percentages of growing funds add up to a lot of money quickly. These charges ought to be relatively static and shouldn't really increase markedly as the fund grows. Some fund groups are also seemingly reducing the AMC whilst maintaining the TER level, something that also doesn't look right to me.

Several groups such as Fidelity have suggested there should be a standard figure for the total cost of fund ownership. It sounds a sensible idea, and speaking from a consumer point of view I ask why the FSA haven't sorted this out already. An opportunity recently seems to have been missed with the introduction of new disclosure documents known as Key Investor Information Documents or KIIDs. Surely it is the FSA's job as the financial services regulator to look at fund costs and how groups are charging.

It seems reasonable to me that a system be put in place where consumers can compare the price of a fund with one annual percentage figure that accurately reflects total cost.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent