Investors losing income by cutting out brokers when dealing with fund management groups
Investors are increasingly dealing directly with fund management groups and losing up to £89m a year in the process, research by brokers Bestinvest has revealed.
In the 12 months to the end of October 2004, 10% of all unit trust and Oeic investments were made directly compared with 9.6% the previous year.
Particularly popular were stocks and shares Isa fund investments, with 25.3% made directly, a 16% increase compared with the year to the end of October 2003.
Bestinvest assesses this has led to direct investors spending £89m on full initial charges, compared with £76m for the previous 12 months.
Dominic Cummings, Bestinvest director, said: "Some individuals may misguidedly invest directly because they see it as the safe option in a bewildering marketplace. As we enter a depolarised world, this confusion may increase, so it is especially important for investors to be clear as to the options available to them if they are to get value for money."
Initial charges comprise commission, usually around 3%, for the intermediary and typically another 2.5% in initial revenue for the fund manager. However, some intermediaries rebate commission to the client, while others can negotiate reductions in the sums going to the manager.
Yet when fund management groups accept direct investments from individuals, they rarely rebate commissions or reduce their initial margin, resulting in investors paying full initial charge.
Justin Modray, Bestinvest head of communications, said: "By simply transacting through a broker who rebates commissions, these investors could save a small fortune, typically £210 or more on a £7,000 fund-based Isa investment. Assuming 7% a year growth over 20 years, that £210 would have grown to £760."
Furthermore, he said buying direct usually means you cannot benefit from using a fund supermarket, the most sensible route to investing.
"A notable exception is Fidelity, which, through FundsNetwork, allows direct supermarket investment and offers discounts, although these discounts are smaller than some brokers and no advice is provided," he added. In the 12 months to the end of October 2004, IMA figures show that gross fund sales made by the public directly with fund management groups amounted to £2.97bn.
Missing out on initial commission rebates alone could have cost these individuals up to £89m.
Adding in the possible further savings that some brokers can negotiate via reduced fund manager margins, Bestinvest believes this increases wasted charges by as much as another 75%.
Modray added: "Our £89m estimate is fairly conservative. First, it does not take account of additional savings that brokers might offer over and above initial commission rebates.
"Second, if we were able to factor in those investors who effectively pay commissions to IFAs or tied advisers and receive little advice or service for the privilege then the amount wasted by individuals on initial charges would be significantly higher than our estimate."