Show your support: Why fund managers must fight back on fund charges

It is extremely hard for fund managers to raise their heads above the parapet in the current climate.

The entire financial services sector has been badly tarnished by bankers' excesses and with markets still precarious, it does not seem like the right time to rock the boat. But now, more than ever, is the time to fight back.

Our whole fund industry is being attacked for ‘hidden' charges and for somehow being complicit in pulling the wool over consumers' eyes. As if this is not bad enough, the repercussions for consumers could be disastrous as they are being totally misled by a campaign so fixated on cost that other considerations are almost completely ignored.

According to the True and Fair campaign led by Alan Miller, a man who made millions while at groups like New Star but now runs a low-cost operation, the UK fund industry is a cosy cartel with no interest in improving transparency for clients and a vested interest in keeping the status quo.

Transparency on charges and investment holdings is the answer for Miller as "full transparency should ultimately lead to a more competitive investment management industry as companies are forced to focus on reducing the total cost of investing".

Aside from the difficulties of providing like-for-like comparisons on charges, any consumer investing with a fund group whose main priority is getting costs down should be very worried. A focus on performance, trading when managers need to and providing a solution to meet clients' investment needs is undoubtedly the main priority for fund management groups.

Keeping costs down is of course in their best interests too to prevent a drag on overall performance (read IMA chief executive Dick Saunders' comments here). To borrow the phrase of Jupiter chief Edward Bonham Carter, fund management is actually 'exquisitely measurable' as performance after fees is then compared to the benchmark. He perhaps speaks for many in the industry when he acknowledges there is a tendency to focus on price at the moment and rightly so, as it is a vital component, but it is just as crucial to consider value for the end investor. 

However, according to the True and Fair campaign, "a lack of transparency throughout the investment management industry ....has led to a loss of consumer trust and confidence". This has resulted in fewer people saving and investing adequately for the future, it says.

I would argue this is not the case at all. People aren't investing due to a huge variety of reasons including debt, falling markets and a crisis of confidence in the life and pensions industry to grow their investments to meet their retirement needs. Giving more information of charges or holdings is not going to change this opinion. In fact it will confuse investors further. If you are giving this detail, on dealing costs for example, you should also provide context. Some funds investing in certain asset classes (or across many) are more expensive to run but there needs to be an explanation behind this not just a number. It all comes back to value again.

The following are the main demands of the campaign, many of which I would argue the fund industry is already meeting or should not be aiming to meet:

-make companies accountable by forcing full disclosure of all holdings within any investment fund, online, on at least a quarterly basis.

The UK fund industry is already extremely highly regulated and must provide fund information in an easy-to-read format which includes fund holdings. This information is widely available for those who want it. It is debatable what use providing all holdings would be to the end consumer.

-enable consumers to compare products and providers on like-for-like terms without hidden costs or fees.

This will not be easy to do, especially for investors with advisers as advice costs will not be easily comparable post-RDR. Certain types of private client or discretionary portfolios will also not be easy to put side by side. No-one wants to restrict information to consumers but the fund industry is getting sick of being accused of somehow deliberately withholding this information. Costs will come out of the funds' performance and overall charges will be broken down further post-RDR.

-create a truly competitive investment management industry.

Fund managers compete on performance. Post-RDR this competition will intensify but rather than costs going down, many groups could charge premium prices for their top performers. Charges may be higher but the extra alpha should compensate. It should be about value not price.

-reduce future mis-selling or financial scandals through greater transparency of fees and investments.

This will make little difference to the number of mis-selling cases. The RDR will mean groups will no longer be able to set sky high commissions on products but there could still be mis-matches between a customer's risk profile and where they are invested. Being able to see every investment won't help either. If investors had been able to see all the Arch cru underlying investments would they have known to withdraw their money? Unlikely.

-restore confidence to this important sector of financial services.

This will be done by ensuring funds are doing what they say on the tin and delivering on performance and meeting client needs.

In conclusion, we should not be encouraging consumers to believe cost and cutting costs is the only criteria they should look at when assessing funds. The changes coming with RDR will not only improve transparency in terms of unbundling charges but also restore consumer confidence as adviser models move away from commission. Our fund industry will evolve post-RDR but this should be driven by consumer needs, not the vested interest of people who would benefit from creating doubt in the minds of consumers about the honesty of the people currently running their money. This will hardly encourage saving.

You may argue Investment Week has a ‘vested' interest in preserving the status quo and protecting the funds industry. That may be so but from my discussions with fund groups and advisers in the lead up to RDR I have found they know changes are coming. They welcome them and acknowledge areas where they could do better. They are not trying to hoodwink consumers but know the battle will be fought on a wide range of issue including, but not dominated by, price.

Forcing a new and expensive model on an industry which could harm rather than help consumers is surely a big mistake. It is now time for the fund industry to take its message to the UK public and show what it can offer instead of being constantly forced on the defensive.

Katrina Lloyd is editor of Investment Week. Contact her on katrina.lloyd@incisivemedia.com or 0207 316 9638.