Since when does a feature “investigation” of asset management fees make the Nine O’Clock News? It is enough to make you choke on your evening glass of St Emilion.
Of course, it is probably some ill-informed hack propagating a confused version of our complex industry to a sensation-seeking BBC, which is in any case run by a bunch of under skilled and overpaid banker-bashers.
However, even such simplistic coverage signals to any alert corporate strategist a definite shift in sentiment. Previously, the broad public has made no fine distinction between banks and asset managers. The sharper among them may have noticed that asset managers tend to hide within the quilted folds of investment banks when times are good, and distance themselves from those institutions when times get tough. But overall scrutiny of the financial sector is now so much fiercer.
Banks may have led us into the Great Recession by imprudent lending, but asset managers, it seems, have their fingers deep in people’s pension and investment pots. With an ageing population more concerned at retirement provision, inter-generational tensions over funding growing, and distant memories of financier Robert Maxwell filching decent workers’ lifelong savings, the topic is an emotive one.
Time to face the fund fee music
Fund managers sometimes like to say they are in ‘investment’, rather than pensions, but to the financial consumer, it is more or less the same thing. Publicly available reports, and some brave individuals, are starting to deconstruct the effect high management fees have on people’s savings and retirement plans. Worse, for those fees most managers fail to meet their own targets.
The BBC Panorama programme has research suggesting some pension companies are taking fees and commissions worth the equivalent of 80% of money paid into pension plans. In one instance, £120,000 paid into one scheme was somewhat undercut by some £99,000 taken out in fees.
In the same programme, Dr Paul Woolley, a finance academic at the London School of Economics, noted fund management fees and brokerage charges have doubled in the last 10 years, amounting to 1.5% in fees. “But the net return to pension funds collectively has reduced. And it has reduced by the amount fees have gone up.”
Meanwhile pensions consultant Malcolm McLean warned an annual charge of 1.5% may not sound high, but the fees grow as the fund gets bigger. “You suddenly find that after 30 or 40 years there’s a terrific amount of money lost and I don’t think many people actually understood that when perhaps they took out the pension,” he said.
Even some managers in the industry are now uncomfortable at practices they found perfectly acceptable several years ago.
Simon James, founding partner at Gore Browne Investment Management, said investors need to be aware of the adverse affects current fee structures and the fee culture within the investment community are having upon their investments. He is pushing for wholesale change to fee composition within the investment community to promote greater transparency between fund managers and consumers.
Alan Miller, veteran of Gartmore, Jupiter and finally New Star, has undergone a Damascene conversion since he set up his own firm, SCM Private, last year. He charges that many managers are milking clients with layers of fees, surrounding basically simple investment products with unnecessary ‘mystique’ to perpetuate their business.
He is prepared to be unconventional now precisely because he has done the conventional bit already. He said the industry should get ready to defend fees and manager performance in terms people can understand.
Gore Browne’s James pointed out pockets of the fee landscape investors should take a careful look at: excessive annual fee levels; ever decreasing prospective investment returns; superfluous advice for straightforward transactions; fiscal and regulatory overkill driving disproportionate initial fees; complexity causing higher ongoing costs, and lack of transparency within fee structures.
Let’s be generous. Who can blame managers for making the most of a buoyant market? For as long as the party swings, let the music play on. But the Government’s spending review has effectively signalled the ride is over. Someone has switched off the music and switched on the lights. What they see is not a pleasant sight.
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